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New Rules for the New 



Published by the Penguin Group 
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Penguin Books Ltd. Registered Offices: 
Harmondsworth, Middlesex, England 

First published in 1998 by Viking Penguin, 
a member of Penguin Putnam Inc. 

10 987654321 

Copyright © Kevin Kelly, 1998 
All rights reserved 

A portion of this work first appeared in Wired, September 1 997, 
as "New Rules for the New Economy: Twelve Dependable 
Principles for Thriving in a Turbulent World." 

Library of Congress Cataloging-in-Publication Data 
Kelly, Kevin. 

New rules for the new economy : 10 radical strategies for 
a connected world / Kevin Kelly, 
p. cm. 

Includes bibliographical references and index. 
ISBN 0-670-88111-2 

1. Economic forecasting. 2. Business forecasting. I. Title 
HC59 15^45 1998 
658 — dc2i 98-36917 

This book is printed on acid-free paper. 

Printed in the United States of America 
Set in Electra 

Designed by Francesca Belanger 

Without limiting the rights under copyright reserved above, 
no part of this publication may be reproduced, stored in or 
introduced into a retrieval system, or transmitted, in any form 
or by any means (electronic, mechanical, photocopying, recording, 
or otherwise), without the prior written permission of both the 
copyright owner and the above publisher of this book. 

For Gia-Miin 


This New Economy i 

1 Embrace the Swarm 9 

2 Increasing Returns 23 
Plentitude, Not Scarcity 39 

4 Follow the Free 50 

5 Feed the Web First 65 
Let Go at the Top 83 

7 From Places to Spaces 94 

No Harmony, All Flux 108 

Relationship Tech 118 

"IO Opportunities Before Efficiencies 140 

A Thousand Points of Wealth 156 

New Rules for the New Economy 161 


NOTES 165 


INDEX 173 

New Rules for the New 

This New Economy 

No one can escape the transforming fire of machines. Technology, which 
once progressed at the periphery of culture, now engulfs our minds as 
well as our lives. Is it any wonder that technology triggers such intense 
fascination, fear, and rage? 

One by one, each of the things that we care about in life is touched 
by science and then altered. Human expression, thought, communica- 
tion, and even human life have been infiltrated by high technology. As 
each realm is overtaken by complex techniques, the usual order is in- 
verted, and new rules established. The mighty tumble, the once confi- 
dent are left desperate for guidance, and the nimble are given a chance 
to prevail. 

But while the fast-forward technological revolution gets all the head- 
lines these days, something much larger is slowly turning beneath it. 
Steadily driving the gyrating cycles of cool technogadgets and gotta- 
haves is an emerging new economic order. The geography of wealth is 
being reshaped by our tools. We now live in a new economy created by 
shrinking computers and expanding communications. 

This new economy represents a tectonic upheaval in our common- 
wealth, a far more turbulent reordering than mere digital hardware has 
produced. The new economic order has its own distinct opportunities 
and pitfalls. If past economic transformations are any guide, those who 
play by the new rules will prosper, while those who ignore them will 
not. We have seen only the beginnings of the anxiety, loss, excitement, 
and gains that many people will experience as our world shifts to a new 
highly technical planetary economy. 

2 / New Rules for the New Economy 

This new economy has three distinguishing characteristics: It is 
global. It favors intangible things — ideas, information, and relation- 
ships. And it is intensely interlinked. These three attributes produce a 
new type of marketplace and society, one that is rooted in ubiquitous 
electronic networks. 

Networks have existed in every economy. What's different now is 
that networks, enhanced and multiplied by technology, penetrate our 
lives so deeply that "network" has become the central metaphor around 
which our thinking and our economy are organized. Unless we can un- 
derstand the distinctive logic of networks, we can't profit from the eco- 
nomic transformation now underway. 

New Rules for the New Economy lays out ten essential dynamics of 
this emerging financial order. These rules are fundamental principles 
that are hardwired into this new territory, and that apply to all busi- 
nesses and industries, not just high-tech ones. Think of the principles 
outlined in this book as rules of thumb. 

Like any rules of thumb they aren't infallible. Instead, they act as 
beacons charting out general directions. They are designed to illumi- 
nate deep-rooted forces that will persist into the first half of the next 
century. These ten laws attempt to capture the underlying principles 
that shape our new economic environment, rather than chase current 
short-term business trends. 

The key premise of this book is that the principles governing the 
world of the soft — the world of intangibles, of media, of software, and 
of services — will soon command the world of the hard — the world of 
reality, of atoms, of objects, of steel and oil, and the hard work done 
by the sweat of brows. Iron and lumber will obey the laws of software, 
automobiles will follow the rules of networks, smokestacks will comply 
with the decrees of knowledge. If you want to envision where the future 
of your industry will be, imagine it as a business built entirely around 
the soft, even if at this point you see it based in the hard. 

Of course, all the mouse clicks in the world can't move atoms in 
real space without tapping real energy, so there are limits to how far the 
soft will infiltrate the hard. But the evidence everywhere indicates that 
the hard world is irreversibly softening. Therefore one can gain a huge 
advantage simply by riding this conversion. To stay ahead, you chiefly 
need to understand how the soft world works — how networks pros- 

This New Economy / 3 

per and grow, how interfaces control attention, how plentitude drives 
value — and then apply those principles to the hard world of now. 

The tricks of the intangible trade will become the tricks of your 

The new economy deals in wispy entities such as information, rela- 
tionships, copyright, entertainment, securities, and derivatives. The U.S. 
economy is already demassifying, drifting toward these intangibles. The 
creations most in demand from the United States (those exported) lost 
50% of their physical weight per dollar of value in only six years. The 
disembodied world of computers, entertainment, and telecommuni- 
cations is now an industry larger than any of the old giants of yore, 
such as construction, food products, or automobile manufacturing. This 
new information-based sector already occupies 15% of the total U.S. 

Yet digital bits, stock options, copyright, and brands have no mea- 
surable economic shape. What is the unit of software: Floppy disks? 
Lines of code? Number of programs? Number of features? Economists 
are baffled. Walter Wriston, former chairman of Citicorp, likes to grum- 
ble that federal economists can tell us exactly how many left-handed 
cowboys are employed each year, yet have no idea how many software 
programs are in use. The dials on our economic dashboard have started 
spinning wildly, blinking and twittering as we head into new territory. 
It's possible the gauges are all broken, but it is much more likely the 
world is turning upside down. 

RememberGM? In the 1950s business reporters were infatuated with 
General Motors. GM was the paragon of industrial progress. It not only 
made cars, it made America. GM was the richest company on earth. To 
many intelligent observers, GM was the future of business in general. It 
was huge, and bigger was better. It was stable and paternal, providing 
lifetime employment. It controlled all parts of its vast empire, ensur- 
ing quality and high profits. GM was the best, and when the pundits 
looked ahead 40 years they imagined all successful companies would be 

How ironic that ever since the future has arrived, GM is now the 
counter example. Today, if your company is like GM, it's in deep trou- 

4 / New Rules for the New Economy 

ble. Instead, pundits point to Microsoft. Microsoft is the role model. 
It is the highest-valued company on Earth. It produces intangibles. It 
rides the logic of standards. Its sky-high stock valuation reflects the new 
productivity. So we look ahead and say: In 40 years all companies will 
be like Microsoft. 

History would suggest this is a bad bet. The obvious lesson is that we 
tend to project the future from what's fashionable at present. Right now 
software and entertainment companies are very profitable, so we assume 
they are role models. Brad DeLong, an economist at UC Berkeley, has 
a handy theory of economic history. He says that various sectors of 
economy wax and wane in prominence like movie stars. The history 
of the American economy can be seen as a parade of "heroic" indus- 
tries that first appear on the scene as unknowns, then heroically "save" 
the economy by doing economic miracles, and for a time are treated 
as economic stars. In the 1900s, the automobile industry was heroic: 
There was incredible innovation, many, many car company upstarts, in- 
credible productivity. It was a wild and exciting time. But then the hero- 
ism died away and the auto industry became big, monolithic, boring, 
and hugely profitable. In DeLong's view, the latest heroic savior is the 
information, communication, and entertainment complex. Businesses 
in the realm of software and communications are now valorous: They 
pull successes out of a hat, stack up unending innovation, and perform 
economic miracles. Long live computers! 

There is a lot of common sense to DeLong's view of heroic industry. 
Just because Microsoft is heroic now, doesn't mean all companies will 
follow their lead and replicate intellectual property on floppy disks with 
a profit margin of 90%. No doubt many, many companies in the future 
will not resemble Microsoft at all. Somebody has to fix the plugged toi- 
lets of the world, somebody has to build houses, somebody has to drive 
the trucks hauling our milk. 

Even Wired magazine, mouthpiece of the digital revolution — where I 
serve as one of the editors — does not approach the ideal of an intangi- 
ble company. Wired is located smack in the middle of an old-fashioned 
downtown city, and in one year turns 8 million pounds (or 48 railway 
cars) of dried tree pulp, and 330,000 pounds of bright colored ink into 
hard copies of the magazine. A lot of atoms are involved. 

So how can we make the claim that all businesses in the world 

This New Economy / 5 

will be reshaped by advances in chips and glass fibers and spectrum? 
What makes this particular technological advance so special? Why is 
the business hero of this moment so much more important than its 
recent predecessors? 

Because communication — which in the end is what the digital tech- 
nology and media are all about — is not just a sector of the economy. 
Communication is the economy. 

This vanguard is not about computers. Computers are over. Most of 
the consequences that we can expect from computers as stand-alone 
machines have already happened. They have sped up our lives, and 
made managing words, numbers, and pixels quite extraordinary, but 
they have not had much more effect beyond that. 

The new economy is about communication, deep and wide. All the 
transformations suggested in this book stem from the fundamental way 
we are revolutionizing communications. Communication is the founda- 
tion of society, of our culture, of our humanity, of our own individual 
identity, and of all economic systems. This is why networks are such a 
big deal. Communication is so close to culture and society itself that 
the effects of technologizing it are beyond the scale of a mere indus- 
trial-sector cycle. Communication, and its ally computers, is a special 
case in economic history. Not because it happens to be the fashionable 
leading business sector of our day, but because its cultural, technologi- 
cal, and conceptual impacts reverberate at the root of our lives. 

Certain technologies (such as the integrated circuit chip) spur in- 
novation and novelty in other technologies; these catalysts are called 
"enabling technologies." Occasionally an economic sector will lever- 
age power and accelerate the advance of other sectors in an economy. 
These can be thought of as "enabling sectors." Computer chips and 
communication networks have produced a sector of an economy that is 
transforming all the other sectors. 

Only a relatively small number of people have ever been directly 
employed in the world of finance. Yet ever since the days of the Vene- 
tian bankers, financial innovations such as mortgages, insurance, ven- 
ture funding, stocks, checks, credit cards, mutual funds, to name only 
a few, have completely reshaped our economy. They have enabled the 

6 / New Rules for the New Economy 

rise of corporations, of market capitalism, of the industrial age, and 
much more. Unlike many previous heroic industries such as the electri- 
cal power industry or the chemical industry, this small sector has influ- 
enced how all business is done, and how we structure our lives. 

As tremendous as the influence of financial inventions have been, 
the influence of network inventions will be as great, or greater. 

It took several billion years on Earth for unicellular life to evolve. 
And it took another billion years or so for that single-celled life to evolve 
multicellular arrangements — each cell touching a few cells near it to 
make a living spherical organism. At first, the sphere was the only form 
multicellular life could take because its cells had to be near one an- 
other to coordinate their functions. After another billion years, life even- 
tually evolved the first cellular neuron — a thin strand of tissue — which 
enabled two cells to communicate over a distance. With that single 
enabling innovation, the variety of life boomed. With neurons, life no 
longer had to remain bounded in a blob. It was possible to arrange cells 
into almost any shape, size, and function. Butterflies, orchids, and kan- 
garoos all became possible. Life quickly exploded in a million different 
unexpected ways, into fantastic awesome varieties, until wonderful life 
was everywhere. 

Silicon chips linked into high-bandwidth channels are the neurons 
of our culture. Until this moment, our economy has been in the 
multicellular stage. Our industrial age has required each customer or 
company to almost physically touch one another. Our firms and or- 
ganizations resemble blobs. Now, by the enabling invention of silicon 
and glass neurons, a million new forms are possible. Boom! An infinite 
variety of new shapes and sizes of social organizations are suddenly 
possible. Unimaginable forms of commerce can now coalesce in this 
new economy. We are about to witness an explosion of entities built on 
relationships and technology that will rival the early days of life on Earth 
in their variety. 

In the future very few companies will look like Microsoft, or even 
Wired. Even ancient forms will be bent. Farming, and trucking, plumb- 
ing, and other traditional occupations will continue, just as unicellular 
life continues. But the economics of farmers and friends, in their own 

This New Economy / 7 

way, will obey the logic of networks, just as Microsoft does now. 

We see evidence for that already. A farmer in America — the hero of 
the agricultural economy — rides in a portable office on his tractor. It's 
air conditioned, has a phone, a satellite-driven GPS location device, 
and sophisticated sensors near the ground. At home his computer is 
connected to the never-ending stream of weather data, the worldwide 
grain markets, his bank, moisture detectors in the soil, digitized maps, 
and his own spreadsheets of cash flow. Yes, he gets dirt under his fin- 
gernails, but his manual labor takes place in the context of a network 

Much the same can be said about truck drivers. While the experi- 
ence of sitting behind a wheel remains unchanged, the new tools of 
trucking — barcodes, radios, dispatch algorithms, route hubs, and even 
roads themselves — all follow the logic of networks. Thus, the very sweat 
of truckers as they manually load and unload heavy boxes becomes in- 
corporated into the network economy. 

Our economy is an amalgamation of diverse styles of trade, com- 
merce, and social exchanges. New economic functions develop around 
the operating old. Barter, one of the earliest forms of commerce, has 
not gone away. The barter economy ran through the agricultural age, the 
industrial age, and continues today. Indeed most of what happens on 
the World Wide Web is barter. Even many years from now a significant 
portion of what the economy does will be done by the industrial lay- 
ers — machines churning out goods and moving materials. The old 
economies will continue to operate profitably within the deep cortex of 
the new economy. 

Yet the inertia of the industrial age continues to mesmerize us. Be- 
tween 1990 and 1996 the number of people making tangible things — 
stuff you can drop on your toe — decreased by 1%, while the number 
of people employed in providing "services" (intangibles) grew 15%. 
Presently a mere 18% of U.S. employment is in manufacturing. But 
three quarters of those 18% actually perform network economy jobs 
while working for a manufacturing company. Instead of pushing atoms 
they push bits around: accountants, researchers, designers, market- 
ing, sales, lawyers, and all the rest who sit at a desk. Only a minus- 
cule percentage of the workforce performs industrial age tasks, yet our 
politics, our media, our funding, and our education continue the grand 

8 / New Rules for the New Economy 

fantasy that industrial jobs need to be created. Within a generation, 
two at the most, the number of people working in honest-to-goodness 
manufacturing jobs will be no more than the number of farmers in the 
land — less than a few percent. Far more than we realize it, the network 
economy is pulling in everyone. 

As the world of chips and glass fibers and wireless waves goes, so 
goes the rest of the world. 

In the face of history this bold assertion may seem naive. But every 
once in a while something big and new does happen. It must have felt 
that way to the home-craft Luddites who sensed that the industrial age 
was not just about newfangled looms, but foreshadowed deep, systemic 
changes with life-changing ramifications. Were they naive to think that 
machines would ultimately transform the ancient and holy act of plant- 
ing seeds and harvesting the grain? Of breeding cows? Of the structure 
of communities? 

"Listen to the technology," advises Carver Mead, one of the inven- 
tors of the modern computer chip. "Find out what it is telling you." 
Following that lead, I have assembled these rules of thumb by asking 
these questions: How do our tools shape our destiny? What kind of an 
economy is our new technology suggesting? 

Steel ingots and rivers of oil, smokestacks and factory lines, and 
even tiny seeds and cud-chewing cows are all becoming enmeshed in 
the world of smart chips and fast bandwidth, and sooner or later they 
will begin to fully obey the new rules of the new economy, as everything 
will. I've listened to the technology, and as best as I can determine, the 
technology repeats ten distinct refrains, as premiered in the following 
ten chapters. 

The Power of Decentralization 

The atom is the icon of the 20th century. The atom whirls alone. It is 
the metaphor for individuality. But the atom is the past. The symbol 
for the next century is the net. The net has no center, no orbits, no cer- 
tainty. It is an indefinite web of causes. The net is the archetype dis- 
played to represent all circuits, all intelligence, all interdependence, all 
things economic, social, or ecological, all communications, all democ- 
racy, all families, all large systems, almost all that we find interesting 
and important. Whereas the atom represents clean simplicity, the net 
channels messy complexity. 

The net is our future. 

Of all the endeavors we humans are now engaged in, perhaps the 
grandest of them all is the steady weaving together of our lives, minds, 
and artifacts into a global scale network. This great work has been go- 
ing on for decades, but recently our ability to connect has accelerated. 
Two brand-new technological achievements — the silicon chip and the 
silicate glass fiber — have rammed together with incredible speed. Like 
nuclear particles crashing together in a cyclotron, the intersection of 
these two innovations has unleashed a never-before-seen force: the 
power of a pervasive net. As this grand net spreads, an animated swarm 
is reticulating the surface of the planet. We are clothing the globe with 
a network society. 

The dynamic of our society, and particularly our new economy, 

io / New Rules for the New Economy 

will increasingly obey the logic of networks. Understanding how 
networks work will be the key to understanding how the economy 

Any network has two ingredients: nodes and connections. In the 
grand network we are now assembling, the size of the nodes is col- 
lapsing while the quantity and quality of the connections are exploding. 
These two physical realms, the collapsing microcosm of silicon and the 
exploding telecosm of connections, form the matrix through which the 
new economy of ideas flows. 

A single silicon transistor today can only be seen in a microscope. 
In a few years it will take a microscope to see an entire chip of transis- 
tors. As the size of silicon chips shrinks to the microscopic, their costs 
shrink to the microscopic as well. In 1950 a transistor cost five dollars. 
Today it costs one hundredth of a cent. In 2003 one transistor will cost 
a microscopic nanocent. A chip with a billion transistors will eventually 
cost only a few cents. 

What this means is that chips are becoming cheap and tiny enough 
to slip into every object we make. Eventually, every can of soup will have 
a chip on its lid. Every light switch will contain a chip. Every book will 
have a chip embedded in its spine. Every shirt will have at least one chip 
sewn into its hem. Every item on a grocery shelf will have stuck to it, or 
embedded within itself, a button of silicon. There are 10 trillion objects 
manufactured in the world each year and the day will come when each 
one of them will carry a flake of silicon. 

This is not crazy, nor distant. Ten years ago the notion that all doors 
in a building should contain a computer chip seemed ludicrous, but 
now there is hardly a hotel door in the U.S. without a blinking, beeping 
chip in its lock. These microscopic chips will be so cheap we'll throw 
them away. Thin slices of plastic known as smart cards now hold a 
throwaway chip smart enough to be your banker. If National Semicon- 
ductor gets its way, soon every FedEx package will be stamped with a 
disposable silicon flake that smartly tracks the contents of the package 
on its journey. And if an ephemeral envelope can have a chip, so can 
your chair, each bag of candy, a new coat, a basketball. Soon, all manu- 
factured objects, from sneakers to drill presses to lamp shades to cans 
of soda, will contain a tiny sliver of embedded thought. 

Embrace the Swarm / n 

And why not? 

Today the world is populated by 200 million computers. Andy Grove 
of Intel happily estimates that we'll see 500 million computers by 2002. 
Yet for every expensive chip put into a beige computer box, there are 
now 30 other cheap processors put into everyday things. The number 
of noncomputer chips already pulsating in the world is 6 billion — one 
chip for every human on Earth. 

We are moving from crunching 
to connecting. While the 
number of computer chips is 
rising, the number of chips in 
objects other than computers is 
rising faster. 

Chips in Objects Chips 

You already have a non-PC chip embedded in your car and stereo 
and rice cooker and phone. These chips are dumb chips, with limited 
ambitions. A chip in your car's brakes doesn't have to do floating-point 
math, spreadsheets, or video processing; it only needs to brake like a 

Because they have limited functions and can be produced in great 
quantity, these dumb chips are ultracheap to make. One industry ob- 
server calculated that an embedded processor chip costs less to manu- 
facture than a ball bearing. Since they can be stamped out as fast and 
cheap as candy gumdrops, these chips are known in the trade as "jelly 
beans." Dumb, cheap jelly bean chips are invading the world far faster 
than PCs did. 

This is not surprising. You can only use one or two personal com- 
puters at a time, but the number of other objects in your life is almost 
unlimited. First, we'll put jelly bean chips into high-tech appliances, 
then later into all tools, and then eventually into all objects. If current 
rates continue there'll be some 10 billion tiny grains of silicon chips 
embedded into our environment by 2005. 

Putting a dot of intelligence into every object we make at first gives 

12 / New Rules for the New Economy 

us a billion dimwitted artifacts. But we are also, at the same time, 
connecting these billion nodes, one by one. 

We are connecting everything to everything. 

There is something mysterious that happens when we take large 
numbers of things that are fairly limited and connect them all together. 
When we take the dumb chip in each cash register in a store and link 
them into a swarm, we have something more than dumb. We have real- 
time buying patterns that can manage inventory. If we take the dumb 
chips that already regulate the guts of an automobile engine, and let 
them communicate an engine's performance to the mechanic of a 
trucking firm, those dumb chips can smartly cut expensive road repairs. 
(Mercedes Benz recently announced it is planning to embed a web 
server into its top-of-the-line model cars so technicians can spot service 
problems remotely.) When connected into a swarm, small thoughts be- 
come smart. 

When we permit any object to transmit a small amount of data and 
to receive input from its neighborhood, we change an inert object into 
an animated node. 

It is not necessary that each connected object transmit much data. 
A tiny chip plastered inside a water tank on an Australian ranch trans- 
mits only the telegraphic 2-bit message of whether the tank is FULL or 
NOT. A chip attached to the ear of each steer on the same ranch beams 
out his location in GPS numbers; nothing more. "I'm here, I'm here" it 
tells the rancher's log book; nothing more. The chip in the gate at the 
end of the rancher's road communicates only a single word, reporting 
when it was last opened: "Tuesday." 

It does not take sophisticated infrastructure to transmit these dumb 
bits. Stationary objects — parts of a building, tools on the factory floor, 
fixed cameras — are wired together. The nonstationary rest — that is, 
most manufactured objects — are linked by infrared and radio, creating 
a wireless web vastly larger than the wired web. The same everyday fre- 
quencies that run garage door openers and TV remote controls will be 
multiplied by the millions to carry the dumb messages of connected 

Embrace the Swarm / 13 


The glory of these connected crumbs is that they don't need to be 
individually sophisticated. They don't need speech recognition, artificial 
intelligence, or fancy expert systems. Instead, the network economy re- 
lies on the dumb power of bits linked together into a swarm. 

Our brains tap into dumb power by clumping dumb neurons into 
consciousness. The internet banks on dumb power by connecting 
dumb personal computers. A personal computer is like a single brain 
neuron in a plastic box. When linked by the telecosm into a neural net- 
work, these dumb PC nodes create that fabulous intelligence called the 
World Wide Web. 

Again and again we see the same dynamic at work in other domains: 
Dumb cells in our body work together in a swarm to produce an incred- 
ibly smart immune system, a system so sophisticated we still do not 
fully comprehend it. 

Dumb parts, properly connected into a swarm, yield smart results. 

A trillion dumb chips connected into a hive mind is the hardware. 
The software that runs through it is the network economy. A planet 
covered with hyperlinked chips is shrouded with waves of sensibility. 
Millions of moisture sensors in the fields of farmers shoot up data, 
hundreds of weather satellites beam down digitized images, thousands 
of cash registers spit out bit streams, myriad hospital bedside monitors 
trickle out signals, millions of web sites tally attention, and tens of mil- 
lions of vehicles transmit their location code; all of this swirls into the 
web. That matrix of signals is the net. 

The net is not just humans typing at one another on AOL, although 
that is a part of it and will be as long as seduction and flaming are 
enjoyable. Rather, the net is the total collective interaction of a trillion 
objects and living beings, linked together through air and glass. 

This is the net that begets the network economy. According to MCI, 
data traffic on the global phone system will soon overtake voice traf- 
fic. The current total volume of voice traffic is 1,000 times that of data, 
but in three years that ratio will flip. ElectronicCast estimates data traf- 
fic — the talk of machines — will be ten times voice traffic by 2005. That 
means that by 2001 most of the signals zipping around the Earth will 

14 / New Rules for the New Economy 

be machines talking to machines — file transfers, data streams, and the 
like. The network economy is already expanding to include new partici- 
pants: agents, bots, objects, and servers, as well as several billion more 
humans. We won't wait for Al to make intelligent systems; we'll do it 
with the swarm power of ubiquitous computing and pervasive connec- 

The surest way to smartness is through massive dumbness. 

The surest way to advance massive connectionism is to exploit de- 
centralized forces — to link the distributed bottom. How do you build a 
better bridge? Let the parts talk to one another. How do you improve 
lettuce farming? Let the soil speak to the farmer's tractors. How do you 
make aircraft safe? Let the airplanes communicate among themselves 
and pick their own flight paths. This decentralized approach, known as 
"free flight," is a system the FAA is now trying to institute to increase 
safety and reduce air-traffic bottlenecks at airports. 

Mathematical problems which were once intractable for super- 
computers have been solved by using a swarm of small PCs. A very 
complex problem is broken up into tiny parts and distributed through- 
out the network. Likewise, vast research projects that would tax any one 
institution can be distributed to an ad hoc network. The Tree of Life is a 
worldwide taxonomic catalog of all living species on Earth administered 
on the web. Such a project is beyond the capabilities of one person or 
group. But a decentralized network can produce the necessary intelli- 
gence. Each local expert supplies their own data (on finches, or ferns or 
jellyfish) to fill in some of the blanks. As Larry Keely of the Doblin Group 
says, "No one is as smart as everyone." 

Any process, even the bulkiest, most physical process, can be tack- 
led by bottom-up swarm thinking. Take, for example, the delivery of wet 
cement in the less-than-digital economy of rural northern Mexico. Here 
Cemex (Cementos Mexicanos) runs a ready-mix cement business that 
is overwhelming its competitors and attracting worldwide interest. It 
used to be that getting a load of cement delivered on time to a con- 
struction site in the Guadalajara region was close to a miracle. Traffic 
delays, poor roads, contractors who weren't ready when they said they 
would be, all added up to an on-time delivery rate of less than 35%. 

Embrace the Swarm / 15 

In response, cement companies tried to enforce rigid advance reserva- 
tions, which, when things went wrong (as they always did), only made 
matters worse ("Sorry, we can't reschedule you until next week."). 

Cemex transformed the cement business by promising to deliver 
concrete faster than pizza. Using extensive networking technology — 
GPS real-time location signals from every truck, massive telecommu- 
nications throughout the company, and full information available to 
drivers and dispatchers, with the authority to act on it — the company 
was able to promise that if your load was more than 10 minutes late, 
you got a 20% discount. 

Instead of rigidly trying to schedule everything ahead of time in an 
environment of chaos, Cemex let the drivers themselves schedule deliv- 
eries ad hoc and in real time. The drivers formed a flock of trucks criss- 
crossing the town. If a contractor called in an order for 12 yards of mix, 
the available truck closest to the site at that time would make the de- 
livery. Dispatchers would ensure customer creditworthiness and guard 
against omissions, but the agents in the field had permission and the 
information they needed to schedule orders on the fly. Result: On-time 
delivery rates reached about 98%, with less wastage of hardened ce- 
ment, and much happier customers. 

Similar thinking has been used in a GM paint plant in Fort Wayne, 
Indiana. The wonderful choice of colors that customers now enjoy on 
new vehicles was playing havoc on the paint line. When one car after 
another is sprayed black, everything is easy. But when one car is red and 
the next white, the painting process is slowed down as painting equip- 
ment is cleansed of one color to make it ready for the next. (The clean- 
out procedure also wastes paint left in the paint lines.) Why not gang 
up all the white cars and do them together? Because ganging up slows 
the line. A car has to be built and completed as it is ordered, as quickly 
as possible. The solution embraces the swarm. 

In the paint factory each robot painter (basically a dimwitted paint- 
ing arm) is empowered to bid on a paint job. If it is currently painting 
red and a car slated to be red is coming down the assembly line, it says, 
"Let me do it," and it beckons the car to its paint station. The robots 
schedule their own work. They have very tiny brainlets, connected to 
a server. No central brain coordinates; the schedule comes from the 
swarm of mini-brains. The result: GM saves $1.5 million a year. The 

16 / New Rules for the New Economy 

equipment requires less paint (due to less cleaning between cars), and 
keeps the line moving faster. 

Railways are now employing swarm technology. Centralized traffic 
control doesn't work when the traffic becomes very complex and time 
cycles are shortened. The Japanese use a bottom-up swarm model to 
schedule their famous bullet express trains, which boast incredible 
punctuality. Switching is done locally and autonomously as if the trains 
were a swarm with one mind. Railway owners in Houston are hoping to 
get a swarm model running for their rail yards. With their current cen- 
trally controlled system, the switching yards are so clogged that there 
is a permanent train of freight cars circling the greater Houston area as 
a buffer. It's like a mobile parking lot. When there's an opening in the 
yard, cars are pulled out of the holding pattern train. But with a system 
based on the swarm model, local lines can autonomously switch them- 
selves, using minimal intelligence onboard. Such a self-regulating and 
self-optimizing system would reduce delays. 

That's how the internet handles its amazing loads of traffic. Every 
email message is broken into bits, with each bit addressed in an en- 
velope, and then all the fragmentary envelopes are sent into a global 
web of pathways. Each envelope seeks the quickest route it can find 
instant by instant. The email message becomes a swarm of bits that are 
reassembled at the other end into a unified message. If the message is 
re-sent to the same destination, the second time it may go by a wholly 
different route. Often the paths are inefficient. Your email may go to 
Timbuktu and back on its way across town. A centralized switching sys- 
tem would never direct messages in such a wasteful manner. But the 
inefficiencies of individual parts is overcome by the incredible reliability 
of the system as a whole. 

The internet model has many lessons for the new economy but per- 
haps the most important is its embrace of dumb swarm power. The aim 
of swarm power is superior performance in a turbulent environment. 
When things happen fast and furious, they tend to route around cen- 
tral control. By interlinking many simple parts into a loose confed- 
eration, control devolves from the center to the lowest or outermost 
points, which collectively keep things on course. 

A successful system, though, requires more than simply relinquish- 
ing control completely to the networked mob. 

Embrace the Swarm / 17 

Complete surrender to the bottom is not what embracing swarm is 

Let me retell a story that I told in Out of Control, a book that details 
the advantages, disadvantages, quirks, and consequences of complex 
systems governed by swarmlike processes. This story illustrates the 
power of a swarm, but it has a new ending, which shows how dumb 
power is not always enough. 

In 1990 about 5,000 attendees at a computer graphics conference 
were asked to operate a computer flight simulator devised by Loren 
Carpenter. Each participant was connected into a network via a virtual 
joy stick. Each of the 5,000 copilots could move the plane's up/down, 
left/right controls as they saw fit, but the equipment was rigged so 
that the jet responded to the average decisions of the swarm of 5,000 
participants. The flight took place in a large auditorium, so there was 
lateral communication (shouting) among the 5,000 copilots as they 
attempted to steer the plane. Remarkably, 5,000 novices were able to 
land a jet with almost no direction or coordination from above. One 
came away, as I did, convinced of the remarkable power of distributed, 
decentralized, autonomous, dumb control. 

About five years after the first show (this is the update), Carpenter 
returned to the same conference with an improved set of simulations, 
better audience input controls, and greater expectations. This time, in- 
stead of flying a jet, the challenge was to steer a submarine through a 
3D undersea world to capture some sea monster eggs. The same audi- 
ence now had more choices, more dimensions, and more controls. The 
sub could go up/down, forward/back, open claws, close claws, and so 
on, with far more liberty than the jet had. When the audience first took 
command of the submarine, nothing happened. Audience members 
wiggled this control and that, shouted and counter-shouted instruc- 
tions to one another, but nothing moved. Each person's instructions 
were being canceled by another person's orders. There was no cohesion. 
The sub didn't budge. 

Finally Loren Carpenter's voice boomed from a loudspeaker in the 
back of the room. "Why don't you guys go to the right?" he hollered. 
Click! Instantly the sub zipped of to the right. With emergent coordina- 
tion the audience adjusted the details of sailing and smoothly set off in 

18 / New Rules for the New Economy 

search of sea monster eggs. 

Loren Carpenter's voice was the voice of leadership. His short mes- 
sage carried only a few bits of information, but that tiniest speck of top- 
down control was enough to unleash the swarm below. He didn't steer 
the sub. The audience of 5,000 novice cocaptains did that very compli- 
cated maneuvering, magically and mysteriously. All Loren did was un- 
lock the swarm's paralysis with a vision of where to aim. The swarm 
again figured out how to get there in the same marvelous way that they 
had figured out how to land the jet five years earlier. 

Without some element of governance from the top, bottom-up con- 
trol will freeze when options are many. Without some element of leader- 
ship, the many at the bottom will be paralyzed with choices. 

Numerous small things connected together into a network generate 
tremendous power. But this swarm power will need some kind of mini- 
mal governance from the top to maximize its usefulness. Appropriate 
oversight depends on the network. In a firm, leadership is supervision; 
in social networks, government; in technical networks, standards and 

We have spent centuries obsessed with the role of top-down gov- 
ernance. Its importance remains. But the great excitement of the new 
economy is that we have only now begun to explore the power of the 
bottom, where peers holds sway. It is a vast mother lode waiting to be 
tapped. With the invention of a few distributed systems, such as the in- 
ternet, we have merely probed the potential of what minimally central- 
ized networks can do. 

At present, there is far more to be gained by pushing the boundar- 
ies of what can be done by the bottom than by focusing on what can be 
done at the top. 

When it comes to control, there is plenty of room at the bottom. 
What we are discovering is that peer-based networks with millions of 
parts, minimal oversight, and maximum connection among them can 
do far more than anyone ever expected. We don't yet know what the 
limits of decentralization are. 

Embrace the Swarm / lg 

The great benefits reaped by the new economy in the coming dec- 
ades will be due in large part to exploring and exploiting the power of 
decentralized and autonomous networks. 

First we make a chip for every object Then we connect them. We 
continue to connect all humans. We enlarge our conversation to in- 
clude the world, and all its artifacts. We let the network of objects gov- 
ern itself as much as possible; we add government where needed. In 
this matrix of connections, we interact and create. This is the net that is 
our future. 

The whole process won't be completed by tomorrow, but the des- 
tiny is clear. We are connecting all to all, until we encompass the entire 
human-made world. And in that embrace is a new power. 


Move technology to invisibility. As technology becomes ubiquitous 
it also becomes invisible. The more chips proliferate, the less we will 
notice them. The more networking succeeds, the less we'll be aware of 

In the early 1900s, at the heroic stage of the industrial economy, 
motors were changing the world. Big, heavy motors ran factories and 
trains and the gears of automation. If big motors changed work, they 
were sure to change the home, too. So the 1918 edition of the Sears, 
Roebuck catalog featured the Home Motor — a five-pound electrical 
beast that would "lighten the burden of the home." This single Home 
Motor would supply all the power needs of a modern family. Also for 
sale were plug-ins that attached to the central Home Motor: an egg 
beater device, a fan, a mixer, a grinder, a buffer. Any job that needed do- 
ing, the handy Home Motor could do. Marc Weiser, a scientist at Xerox, 
points out that the electric motor succeeded so well that it became in- 
visible. Eighty years later nobody owns a Home Motor. We have instead 
dozens of micromotors everywhere. They are so small, so embedded, 
and so common that we are unconscious of their presence. We would 
have a hard time just listing all the motors whirring in our homes today 
(fans, clocks, water pumps, video players, watches, etc.). We know the 

20 / New Rules for the New Economy 

industrial revolution succeeded because we can no longer see its sol- 
diers, the motors. 

Computer technology is undergoing the same disappearance. If the 
information revolution succeeds, the standalone desktop computer 
will eventually vanish. Its chips, its lines of connection, even its visual 
interfaces will submerge into our environment until we are no longer 
conscious of their presence (except when they fail). As the network age 
matures, we'll know that chips and glass fibers have succeeded only 
when we forget them. Since the measure of a technology's success 
is how invisible it becomes, the best long-term strategy is to develop 
products and services that can be ignored. 

If it is not animated, animate it. Just as the technology of writing 
now covers almost everything we make (not just paper), so too the 
technologies of interaction will soon cover all that we make (not just 
computers). No artifact will escape the jelly bean chip; everything can 
be animated. Yet even before chips reach the penny price, objects can 
be integrated into a system as if they are animated. Imagine you had a 
million disposable chips. What would you do with them? It's a good bet 
that half of the value of those chips could be captured now, with exist- 
ing technology, by creating a distributed swarmlike intelligence using 
such dumb power. 

If it is not connected, connect it. As a first step, every employee of an 
institution should have intimate, easy, continuous access to the institu- 
tion's medium of choice — email, voicemail, radio, whatever. The ben- 
efits of communication often don't kick in until ubiquity is approached; 
aim for ubiquity. Every step that promotes cheap, rampant, and univer- 
sal connection is a step in the right direction. 

Distribute knowledge. Use the minimal amount of data to keep all 
parts of a system aware of one another. If you operate a parts ware- 
house, for example, your system needs to be knowledgeable of each 
part's location every minute. That's done by barcoding everything. But 
it needs to go further. Those parts need to be aware of what the sys- 
tem knows. The location of parts in a warehouse should shift depend- 
ing on how well they sell, what kind of backlog a vendor forecasts, how 
their substitutes are selling. The fastest-moving items (which will be 
a dynamic list) may want to be positioned for easier picking and ship- 

Embrace the Swarm / 21 

ping. The items move in response to the outside — if there is a system 
to spread the info. 

Get machines to talk to one another directly. Information should 
flow laterally and not just into a center, but out and between as well. 
The question to ask is, "How much do our products/services know 
about our business?" How much current knowledge flows back into the 
edges? How well do we inform the perimeter, because the perimeter is 
the center of action. 

If you are not in real time, you're dead. Swarms need real-time com- 
munication. Living systems don't have the luxury of waiting overnight 
to process an incoming signal. If they had to sleep on it, they could die 
in their sleep. With few exceptions, nature reacts in real time. With few 
exceptions, business must increasingly react in real time. High transac- 
tion costs once prohibited the instantaneous completion of thousands 
of tiny transactions; they were piled up instead and processed in cost- 
effective batches. But no longer. Why should a phone company get paid 
only once a month when you use the phone every day? Instead it will 
eventually bill for every call as the call happens, in real time. The flow 
of crackers off grocery shelves will be known by the cracker factory in 
real time. The weather in California will be instantly felt in the assembly 
lines of Ohio. Of course, not all information should flow everywhere; 
only the meaningful should be transmitted. But in the network economy 
only signals in real time (or close to it) are truly meaningful. Examine 
the speed of knowledge in your system. How can it be brought closer 
to real time? If this requires the cooperation of subcontractors, distant 
partners, and far-flung customers, so much the better. 

Count on more being different. A handful of sand grains will never 
form an avalanche no matter how hard one tries to do it. Indeed one 
could study a single grain of sand for a hundred years and never con- 
clude that sand can avalanche. To form avalanches you need millions 
of grains. In systems, more is different. A network with a million nodes 
acts significantly different from one with hundreds. The two networks 
are like separate species — a whale and an ant, or perhaps more accu- 
rately, a hive and an ant. Twenty million steel hammers swinging in uni- 
son is still 20 million steel hammers. But 20 million computers in a 
swarm is much, much more than 20 million individual computers. 

22 / New Rules for the New Economy 

Do what you can to make "more." In a network the chicken-and-egg 
problem can hinder growth at first — there's no audience because there 
is no content, and there is no content because there is no audience. 
Thus, the first efforts at connecting everything to everything sometimes 
yield thin fruit. At first, smart cards look no different from credit cards — 
just more inconvenient. But more is different; 20 million smart cards is 
a vastly different beast than 20 million credit cards. 

It's the small things that change the most in value as they become 
"more." A tiny capsule that beeps and displays a number, multiplied by 
millions: the pager system. What if all the Gameboys or PlayStations in 
the world could talk to one another? What if all the residential electric 
meters in a city were connected together into a large swarm? If all the 
outdoor thermometers were connected, we would have a picture of our 
climate a thousand times better than we have ever had before. 

The ants have shown us that there is almost nothing so small in the 
world that it can't be made larger by embedding a bit of interaction in 
many copies of it, and then connecting them all together. 

The game in the network economy will be to find the overlooked 
small and figure out the best way to have them embrace the swarm. 


Self-Reinforcing Success 

Networks have their own logic. When you connect all to all, curious 
things happen. 

Mathematics says the sum value of a network increases as the 
square of the number of members. In other words, as the number of 
nodes in a network increases arithmetically, the value of the network 
increases exponentially." Adding a few more members can dramatically 
increase the value for all members. 

This amazing boom is not hard to visualize. Take 4 acquaintances; 
there are 12 distinct one-to-one friendships among them. If we add a 
fifth friend to the group, the friendship network increases to 20 different 
relations; 6 friends makes 30 connections; 7 makes 42. As the number 
of members goes beyond 10, the total number of relationships among 
the friends escalates rapidly. When the number of people (n) involved is 
large, the total number of connections can be approximated as simply 
n x n, or n 2 . Thus a thousand members can have a million friendships. 

The magic of n 2 is that when you annex one more new member, you 

*l use the vernacular meaning of "exponential" to mean "explosive com- 
pounded growth." Technically, n 2 growth should be called polynomial, or even 
more precisely, a quadractic; a fixed exponent (2 in this case) is applied to a grow- 
ing number n. True exponential growth in mathematics entails a fixed number 
(say 2) that has a growing exponent, n, as in 2". The curves of some polynomials 
and exponentials look similar, except the exponential is even steeper; in common 
discourse the two are lumped together. 

24 / New Rules for the New Economy 

add many more connections; you get more value than you add. That's 
not true in the industrial world. Say you owned a milk factory, and you 
had 10 customers who bought milk once a day. If you increased your 
customer base by 10% by adding one new customer, you could expect 
an increase in milk sales of 10%. That's linear. But say, instead, you 
owned a telephone network with 10 customers who talked to each other 
once a day. Your customers would make about n 2 (10 2 ), or 100 calls a 
day. If you added one more new customer, you increased your customer 
base by 10%, but you increased your calling revenue by a whopping 
20% (since 11 2 is 20% larger than 10 2 ). In a network economy, small 
efforts can lead to large results. 

A network's tendency to explode in value mathematically was first 
noticed by Bob Metcalfe, the inventor of a localized networking technol- 
ogy called Ethernet. During the late 1970s Metcalfe was selling a combi- 
nation of Ethernet, Unix, and TCP/IP (the internet protocol), as a way to 
make large networks out of many small ones. Metcalfe says, "The idea 
that the value of a network equals n squared came to me after I failed 
to get networks to work on a small scale, despite many repeated experi- 
ments." He noticed that networks needed to achieve critical mass to 
make them worthwhile. But he also noticed that as he linked together 
small local networks here and there, the value of the combined large 
network would multiply abruptly. In 1980 he began formulating his law: 
value = n x n. 

In fact, n 2 underestimates the total value of network growth. As 
economic journalist John Browning notes, the power of a network mul- 
tiplies even faster than this. Metcalfe's observation was based on the 
idea of a phone network. Each telephone call had one person at each 
end; therefore the total number of potential calls was the grand sum of 
all possible pairings of people with phones. But online networks, like 
personal networks in real life, provide opportunities for complicated 
three-way, four-way, or many-way connections. You can not only interact 
with your friend Charlie, but with Alice and Bob and Charlie at the same 
time. The experience of communicating simultaneously with Charlie's 
group in an online world is a distinct experience, separate in its essen- 
tial qualities, from communicating with Charlie alone. Therefore, when 
we tally up the number of possible connections in a network we have to 
add up not only all the combinations in which members can be paired, 

Increasing Returns / 25 

but also all the possible groups as well. These additional combos send 
the total value of the network skyrocketing. The precise arithmetic is 
not important. It is enough to know that the worth of a network races 
ahead of its input. 

This tendency of networks to drastically amplify small inputs leads 
to the second key axiom of network logic: the law of increasing returns. 
In one way or another this law undergirds much of the strange behavior 
in the network economy. The simplest version goes like this: The value 
of a network explodes as its membership increases, and then the value 
explosion sucks in yet more members, compounding the result. 

An old saying puts it succinctly: Them that's got shall get. 

A new way of saying it: Networks encourage the successful to be yet 
more successful. Economist Brian Arthur calls this effect "increasing 
returns." "Increasing returns" he says, "are the tendency for that which 
is ahead to get further ahead; for that which loses advantage to lose 
further advantage." 

In the industrial economy success was self-limiting; it obeyed the 
law of decreasing returns. In the network economy, success is self- 
reinforcing; it obeys the law of increasing returns. 

We see the law of increasing returns operating in the way areas such 
as Silicon Valley grow; each successful new start-up attracts other start- 
ups, which in turn attract more capital and skills and yet more start-ups. 

In networks, we find self- 
reinforcing virtuous circles. 
Each additional member 
increases the network's value, 
which in turn attracts more 
members, initiating a spiral of 

26 / New Rules for the New Economy 

(Silicon Valley and other high-tech industrial regions are themselves 
tightly coupled networks of talent, resources, and opportunities.) 

At first glance the law of increasing returns may seem identical to 
the familiar textbook notion of economies of scale: The more of a prod- 
uct you make, the more efficient the process becomes. Henry Ford lev- 
eraged his success in selling automobiles to devise more productive 
methods of manufacturing cars. This enabled Ford to sell his cars more 
cheaply, which created larger sales, which fueled more innovation and 
even better production methods, sending his company to the top. 

That self-feeding circle is a positive feedback loop. While the law 
of increasing returns and the economies of scale both rely on positive 
feedback loops, there are two key differences. 

First, industrial economies of scale increase value gradually and lin- 
early. Small efforts yield small results; large efforts give large results. 
Networks, on the other hand, increase value exponentially — small ef- 
forts reinforce one another so that results can quickly snowball into an 
avalanche. It's the difference between a piggy bank and compounded 

Second, and more important, industrial economies of scale stem 
from the herculean efforts of a single organization to outpace the com- 
petition by creating value for less. The expertise (and advantage) de- 
veloped by the leading company is its alone. By contrast, networked 
increasing returns are created and shared by the entire network. Many 
agents, users, and competitors together create the network's value. Al- 
though the gains of increasing returns may be reaped unequally by one 
organization, the value of the gains resides in the greater web of rela- 

These positive feedback loops are created by "network externalities." 
Anything that creates (or destroys) value which cannot be appointed to 
someone's account ledgers is an externality. The total value of a tele- 
phone system lies outside the total internal value of the telephone com- 
panies and their assets. It lies externally in the greater phone network 
itself. Networks are particularly potent sources of external value and 
have become a hot spot of economic investigation in the last decade. A 
parade of recently published academic papers scrutinize the fine points 
of network externalities: When do they arise? How do they break down? 

Increasing Returns / 27 

Are they symmetrical? Can they be manipulated? 

One reason increasing returns and network externalities are garner- 
ing attention is because they tend to create apparent monopolies. Huge 
amounts of cash pour toward network winners such as Cisco or Oracle 
or Microsoft, and that makes everyone else nervous. Are network super- 
winners in fact monopolies? They are not like any monopolies of the 
industrial age. When antitrust hearings are conducted today, the wit- 
nesses are not customers angered by high pricing, haughty service, or 
lack of options — the traditional sins of a monopolist. Customers have 
nothing to complain about because they get lower prices, better service, 
and more features from network superwinners — at least in the short 
term. The only ones complaining about superwinners are their com- 
petitors, because increasing returns create a winner-take-most environ- 
ment. But in the long term, the customer will have reason to complain 
if competitors pull back or disappear. 

The new monopolies are different in several ways. Traditional mo- 
nopolies dominated commodities. In the new order, as Santa Fe Insti- 
tute economist Brian Arthur points out, "Dominance may consist not 
so much in cornering a single product as in successively taking over 
more and more threads of the web of technology." Superwinners can 
practice a type of crossover where control of one layer of the web lever- 
ages control into others. Owning the standard for voice phone calls can 
ease the likelihood of owning the standard for fax transmissions. 

The unacceptable transgression of the traditional monopolist was 
that as a mono-seller (thus the Greek, mono-polist), it could push 
prices up and quality down. But the logic of the net inherently lowers 
prices and raises quality, even those of a single-seller monopolist. In 
the network economy, the unpardonable transgression is to stifle inno- 
vation, which is what happens when competition is stifled. In the new 
order, innovation is more important than price because price is a de- 
rivative of innovation. 

Mono-sellers are actually desirable in a network economy. Because 
of increasing returns and n 2 value, a single large pool is superior to 
many smaller pools. The network economy will breed mono-sellers with 
great fertility. What is intolerable in a network economy is "monova- 
tion" — depending upon a single source of innovation. The danger of 

28 / New Rules for the New Economy 

monopolists in the network economy is not that they can raise prices 
but they can become monovationists. But there are ways to encourage 
"polyvation" — multiple sources of innovation — in a world of monopo- 
lists: by creating open systems, by moving key intellectual properties 
into the public domain, by releasing source code democratically. As we 
come to understand the importance of increasing returns and the other 
new rules of the network economy, we can expect shifts in our under- 
standing of the role of market winners. 

Industrial monopolies exploited simple economies of scale for their 
own benefit. Network effects are not about economies of scale, they are 
about value that is created above and beyond a single organization — by 
a larger network — and then returned to the parts, often unevenly. Be- 
cause some portion of the value of a network firm so obviously comes 
from external sources, allegiance is often granted to external sources. 

We see this in the way network effects govern the growth of Silicon 
Valley. Silicon Valley's success is external to any particular company's 
success, and so loyalty is external, too. As AnnaLee Saxenian, author of 
Regional Advantage, notes, Silicon Valley has in effect become one large, 
distributed company. People job-hop so frequently that folks "joke that 
you can change jobs without changing car pools. Some say they wake 
up thinking they work for Silicon Valley. Their loyalty is more to advanc- 
ing technology or to the region than it is to any individual firm." 

This trend seems likely to extend further. We are headed into an era 
when both workers and consumers will feel more loyalty to a network 
than to any ordinary firm. The great innovation of Silicon Valley is not 
the wowie-zowie hardware and software it has invented. Silicon Valley's 
greatest "product" is the social organization of its companies and, most 
important, the networked architecture of the region itself — the tangled 
web of former jobs, intimate colleagues, information leakage from one 
firm to the next, rapid company life cycles, and agile email culture. This 
social web, suffused into the warm hardware of jelly bean chips and 
copper neurons, creates a true network economy. 

The social web, even in the Valley, displays some stress marks. There 
is no question that the network economy is, at worst, winner-take-all, 
and at best, winner-take-most. The trajectory of increasing returns and 
a shortage of attention focuses success toward a few points. Stars and 
hits rise, while the rest languish. Mundane appliances and bulky objects 

Increasing Returns / 29 

now seem to follow the Hollywood model: A few brands sell like crazy, 
and the rest sell only a few. It's a "hits" economy, where resources flow 
to those that show some life. If a new novel, new product, or new ser- 
vice begins to succeed it is fed more; if it falters, it's left to wither. Them 
that has, gets more. 

The current great debate is whether the law of increasing returns 
favors the early or not. In some of the first studies of increasing returns, 
economist Brian Arthur discovered that when technological competi- 
tors, such as the VHS and Betamax video formats, were modeled in a 
computer, increasing returns favored one technology over the other — 
to the eventual demise of the unfortunate one (in this case Betamax). 
And "unfortunate" is the right word. According to Arthur's research, the 
technology that came to dominate, thanks to increasing returns, was 
not necessarily the superior one. It was just the lucky one. Or the early 
one. Arthur writes: "If a product or a company or a technology — one of 
many competing in a market — gets ahead by chance or clever strategy, 
increasing returns can magnify this advantage, and the product or com- 
pany can go on to lock in the market." 

All things being equal, early success has a measurable advantage. 
But in real life all things are rarely equal. Technologies which seem to 
be inferior and yet prevail through the dynamics of increased returns 
often reveal themselves under further study to be slightly superior in 
key ways. The Sony Betamax format lost to VHS because it couldn't 
record for as long as VHS could, and, according to some, because Sony 
discouraged Beta use for porno — an early use of video. Apple Comput- 
er's superior operating system lost to Windows because Apple had an 
inferior price — due to its misguided monopolist strategy. The suppos- 
edly ergonomic Dvorak keyboard lost to the all-too-familiar QWERTY 
keyboard because the Dvorak layout really wasn't any faster. 

Being first or best sometimes helps, but not always. The outcome 
of competition in a network is not determined solely by the abilities of 
the competitors, but by tiny differences, including luck, that are greatly 
magnified by the power of positive feedback loops. The fate of com- 
petition is "path dependent" on minor nudges and hurdles that can 
"tip" the system in one direction or another. Final destiny cannot be 
predicted on the basis of exceptional attributes alone. 

What can be predicted is the way in which networks enlarge small 

30 / New Rules for the New Economy 

advantages, and then lock the advantage in. In the same way, initial pa- 
rameters and conventions can quickly freeze into unalterable stan- 
dards. The solidifying standards of a network are both a blessing and a 
curse — a blessing because the ad hoc agreement reduces risk, and thus 
sparks widespread progress, and a curse because those who own or 
control the standard are disproportionately rewarded. 

But the network economy doesn't allow the blessing without the 
curse. Microsoft's billions are tolerated (more or less) because so many 
others in the network economy have made their collective billions on 
the advantages of Microsoft's increasing-returns standards. 

We forget how recent and sudden Microsoft's prominence is. Micro- 
soft is a textbook example of Metcalfe's law ("The value of Windows in- 
creases exponentially as its users increase arithmetically") and the law 
of increasing returns ("The more who use NT, the more attractive NT 
becomes"). Microsoft also illustrates the third corollary of increasing 
returns: how small signals can suddenly become booms. 

During its first 10 years, Microsoft's profits were negligible. Its prof- 
its rose above the background noise of Wall Street only around 1985. 
But once they began to rise, they exploded. A chart of Microsoft's cor- 
nucopia of profits is an exponentially booming curve, one that parallels 
several other rising stars in the network economy. 

Federal Express experienced a similar trajectory: years of minuscule 
profit increases, slowly ramping up to an invisible threshold, and then 
surging skyward in a blast sometime during the early 1980s. 

The story of fax machines is likewise a tale of a 20-year-long over- 
night success. After two decades of marginal success, the number of 
fax machines quietly crossed the point of no return during the mid- 

Network organizations 
experience small gains 
while their network is being 
seeded. Once the network is 
established, explosive growth 
follows with relatively little 
additional genius. 

Increasing Returns / 31 

1980s — and the next thing you know, they were everywhere. 

The archetypal case of a success explosion in a network economy 
is the Internet itself. As any proud old-time nethead will be happy to 
explain, the internet was a lonely (but thrilling!) cultural backwater for 
two decades before it showed up on the media radar. A graph of the 
number of internet hosts worldwide, starting in the 1970s, stays barely 
above the bottom line, until around 1991, when the global tally of hosts 
suddenly mushroomed, exponentially acting upward to take over the 

The curves of Microsoft, the internet, fax machines and FedEx (I 
owe Net Gain author John Hagel credit for these four examples) are 
templates of exponential growth, compounding in a biological way. 
Such curves are almost the definition of a biological system. That's one 
reason the network economy is often described most accurately in bio- 
logical terms. Indeed, if the web feels like a frontier, it's because for the 
first time in history we are witnessing biological growth in technological 

A good definition of a network is organic behavior in a technological 

The compounded successes of Microsoft, FedEx, fax machines, and 
the internet all hinge on the prime law of networks: Value explodes ex- 
ponentially with membership, and this heightened value acts like grav- 
ity drawing in yet more members. The virtuous circle inflates until all 
potential members are joined. 

This explosion, however, did not ignite until approximately the late 
1980s. Two things happened then — the dual big bangs of almost-free 
jelly bean chips and collapsing telco charges. It became feasible — that 
is, dirt cheap — to exchange data almost anywhere, anytime. The net, 
the grand net, began to precipitate out of this supersaturated solution. 
Network power followed. 

One of the hallmarks of the industrial age was its reasonable expec- 
tations. Success was in proportion to effort. Small effort, small gains. 
Large effort, large gains. This linear ratio is typical of capital invest- 
ments and resource allotments. According to data from the U.S. Statis- 
tical Abstract, the best-selling products in the 1950s — appliances such 

32 / New Rules for the New Economy 

as refrigerators, clocks and washing machines — sold steadily with only 
a slight 2% annual increase in the number of units sold per year. To 
imagine the future of an enterprise or innovation one needed only to 
extrapolate the current trends in a straight line. There was a comfort- 
able assumption — largely true — that the world proceeded linearly. En- 
tirely new phenomenona did not ordinarily appear out of nowhere and 
change everything within months. 

With the advent of large-scale electronic media networks in the mid 
century, that assumption began to erode. Millions of kids watching 
TV grew up to create rapid fads (hula hoops), instant youth cultures 
such as the beats and hippies, with sudden spontaneous gatherings 
of half a million, as at Woodstock. Events did not happen linearly. With 
media networks it was no longer safe to extrapolate the future from 
the recent past. When success came, it often fed on itself in crazy hy- 
perkinetic booms. The recent sales of electronic pets is one example. 
Tamagotchis, the original brand of Japanese toy pets, went from sales 
of zero in Japan to 10 million units in their first year, to 20 million by 
the second year. When they were introduced in the United States a half 
million units were sold in the first month. The Tamagotchis could be 
actual breeding animals judging simply from their growth rate because 
their sales curve follows the population curve of reproducing biological 
animals. One day there are two pets, the next year there are 200. In bio- 
logical populations, success can easily compound into runaway growth; 
now this wild runaway growth is happening with technology. 

Everyday we see evidence of biological growth in technological sys- 
tems. This is one of the marks of the network economy: that biology 
has taken root in technology. And this is one of the reasons why net- 
works change everything. 

Here's how this happened. Most of the technology in the early part 
of the century was relegated to the inside of a factory. Only business- 
men cared about advancing technology — cheaper production methods 
or more specialized materials. The consumer products this advanced 
technology spun off into homes were, more often than not, labor-sav- 
ing devices — sewing machines, vacuum cleaners, water pumps. They 
saved time, and thereby enhanced the prevailing culture. But the de- 

Increasing Returns / 33 

vices themselves (except for the automobile) were merely gadgets. 
They were technology — something foreign, best used in small doses, 
and clearly not the social and economic center of our lives. It was once 
very easy to ignore technology because it did not penetrate the areas of 
our lives we have always really cared about: our networks of friendship, 
writing, painting, cultural arts, relationships, self-identity, civil organi- 
zations, the nature of work, the acquisition of wealth, and power. But 
with the steady advent of technology into the networks of communica- 
tion and transportation, technology has completely overwhelmed these 
social areas. Our social space has been invaded by the telegraph, the 
phonograph, the telephone, the photograph, the television, the airplane 
and car, then by the computer, and the internet, and now by the web. 

Technology has become our culture, our culture technology. 

Technology is no longer outside, no longer alien, no longer at the 
periphery. It is at the center of our lives. "Technology is the campfire 
around which we gather," says musician/artist Laurie Anderson. For 
many decades high tech was marginal in presence. Then suddenly — 
blink — it is everywhere and all-important. 

Technology has been able to infiltrate into our lives to the degree it 
has because it has become more like us. It's become organic in struc- 
ture. Because network technology behaves more like an organism than 
like a machine, biological metaphors are far more useful than mechani- 
cal ones in understanding how the network economy runs. 

But if success follows a biological model, so does failure. A caution- 
ary tale: One day, along the beach, tiny red algae suddenly blooms into 
a vast red tide. A few weeks later, just when the red mat seems indelible, 
it vanishes. Lemmings boom, then disappear as suddenly. The same bi- 
ological forces that multiply populations can decimate them. The same 
forces that feed on one another to amplify network presences creating 
powerful standards overnight can also work in reverse to unravel them 
in a blink. The same forces that converge to build up organizations in 
so biological a fashion can also converge to tear them down. One can 
expect that when Microsoft's fortunes falter, their profits will plunge in 
a curve inversely symmetrical to their success. All the self-reinforcing 
reasons to join a network's success run in reverse when the success 

34 / New Rules for the New Economy 

turns to failure and everyone wants to flee. 

One more biological insight can be gleaned from the success of 
Microsoft, FedEx, and the internet. In retrospect one can see that at 
some point in their history the momentum toward them became so 
overwhelming that success became a runaway event. Success became 
infectious, so to speak, and spread pervasively to the extent that it be- 
came difficult for the uninfected to avoid succumbing. Take the arrival 
of the phone network. How long can you hold out not having a phone? 
Only 6% of U.S. homes are still holding out. 

In epidemiology, the point at which a disease has infected enough 
hosts that it must be considered a raging epidemic can be thought of as 
the tipping point. The contagion's momentum has tipped from push- 
ing uphill against all odds to rolling downhill with all odds behind it. In 
biology, the tipping points of fatal diseases are fairly high, but in tech- 
nology, they seem to be triggered at much lower points. 

There has always been a tipping point in any business, industrial or 
network, after which success feeds upon itself. However, the low fixed 
costs, insignificant marginal costs, and rapid distribution that we find 
in the network economy depresses tipping points below the levels of in- 
dustrial times; it is as if the new bugs are more contagious — and more 
potent. It takes a smaller initial pool to lead to runaway dominance, 

Lower tipping points also mean that the threshold of significance — 
the period before the tipping point during which a movement, growth, 

During the exponential 
gains peculiar to networks, 
compounding effects can pass 
a point of runaway growth. But 
it is before this point, before 
momentum builds, that one 
needs to pay attention. 

or innovation must be taken seriously — is also dramatically lower than 
it was during the industrial age. Detecting developments while they are 

Increasing Returns / 35 

beneath this threshold of significance is essential. 

Major U.S. retailers refused to pay attention to TV home-shopping 
networks during the 1980s because the number of people watching and 
buying from them was initially so small and marginalized that it did 
not meet the established level of retail significance. The largest U.S. re- 
tailers work in the realm of hundreds of millions. The first TV home 
shopping was dealing in the realm of thousands. Retailers discovered 
that shoppers would watch 50 hours of home-shopping programs be- 
fore making their first purchase. The retailers considered this horrible 
news. But it turns out "watching others do it" was an initiation ritual. 
Shoppers trust other shoppers. Once shoppers were "invested" in the 
process by watching many others do it successfully, they kept coming 
back. So small numbers grew steadily and then rapidly as more shop- 
pers brought in yet more shoppers. Instead of heeding the new subtle 
threshold of network economics, the retailers waited until the alarm of 
the tipping point sounded, which meant, by definition, that it was too 
late for them to cash in. 

In the past, an innovation's momentum indicated significance. Now, 
in the network environment, where biological behavior reigns, signifi- 
cance precedes momentum. 

One final parable rooted in biology. In a pond one summer a float- 
ing lily leaf doubles in size every day until it covers the entire surface of 
water. The day before it completely covers the pond, the water is only 
half covered, and the day before that, only a quarter covered, and the 
day before that, only a measly eighth. While the lily grows imperceptibly 
all summer long, only in the last week of the cycle would most bystand- 
ers notice its "sudden" appearance. By then, it is far past the tipping 

The network economy is like a lily pond. Most of the pond looks 
empty, but a few lilies are doubling in size. The web, for example, is a 
leaf doubling every six months. Despite the one million web sites to 
date, the web's future has just begun. Other lily leaves are sprouting 
along the edges of the pond: MUDs, Irridium phones, wireless data 
ports, collaborative bots, WebTV, and remote solid state sensors. Right 
now, they are all just itsy-bitsy lily cells brewing at the beginning of a hot 

36 / New Rules for the New Economy 

network summer. One by one, they will pass their tipping points, and 
suddenly become ubiquitous. 


Check for externalities. The initial stages of exponential growth looks 
as flat as any new growth. How can you detect significance before mo- 
mentum? By determining whether embryonic growth is due to network 
effects rather than to the firm's direct efforts. Do increasing returns, 
open systems, n 2 members, multiple gateways to multiple networks 
play a part? Products or companies or technologies that get slightly 
ahead — even when they are second best — by exploiting the net's effects 
are prime candidates for exponential growth. 

Coordinate smaller webs. The fastest way to amp up the worth of 
your own network is to bring smaller networks together with it so they 
can act as one larger network and gain the total n 2 value. The inter- 
net won this way. It was the network of networks, the stuff in between 
that glued highly diverse existing networks together. Can you take the 
auto parts supply network and coordinate it with the insurance adjust- 
ers network plus the garage repair network? Can you coordinate the in- 
tersection of hospital records with standard search engine technology? 
Do the networks of county property deed databases, U.S. patents, and 
small-town lawyers have anything useful in common? One thousand 
members in one network are far more powerful than one thousand 
members in three networks. 

Create feedback loops. Networks sprout connections and connec- 
tions sprout feedback loops. There are two elementary kinds of loops: 
Self-negating loops such as thermostats and toilet bowl valves, which 
create feedback loops that regulate themselves, and self-reinforcing 
loops, which are loops that foster runaway growth such as increasing 
returns and network effects. Thousands of complicated loops are pos- 
sible using combinations of these two forces. When internet providers 
first started up, most charged users steeper fees to log on via high- 
speed modem; the providers feared speedier modems would mean 

Increasing Returns / 37 

fewer hours of billable online time. The higher fees formed a feedback 
loop that subsidized the provider's purchase of better modems, but 
discouraged users from buying them. But one provider charged less 
for high speed. This maverick created a loop that rewarded users to 
buy high-speed modems; they got more per hour and so stayed longer. 
Although it initially had to sink much more capital into its own modem 
purchases, the maverick created a huge network of high-speed freaks 
who not only bought their own deluxe modems but had few alternative 
places to go at high speed. The maverick provider prospered. As a new 
economy business concept, understanding feedback is as important as 

Protect long incubations. Because the network economy favors the 
nimble and quick, anything requiring patience and slowness is handi- 
capped. Yet many projects, companies, and technologies grow best 
gradually, slowly accumulating complexity and richness. During their 
gestation period they will not be able to compete with the early birds, 
and later, because of the law of increasing returns, they may find it dif- 
ficult to compete as well. Latecomers have to follow Drucker's Rule — 
they must be ten times better than what they hope to displace. Delayed 
participation often makes sense when the new offering can increase 
the ways to participate. A late entry into the digital camera field, for in- 
stance, which offered compatibility with cable TV as well as PCs, could 
make the wait worthwhile. 

It's a hits game for everyone. In the network economy the winner- 
take-all behavior of Hollywood hit movies will become the norm for 
most products — even bulky manufactured items. Oil wells are financed 
this way now; a few big gushers pay for the many dry wells. You try a 
whole bunch of ideas with no foreknowledge of which ones will work. 
Your only certainty is that each idea will either soar or flop, with little in 
between. A few high-scoring hits have to pay for all the many flops. This 
lotterylike economic model is an anathema to industrialists, but that's 
how network economies work. There is much to learn from long-term 
survivors in existing hits-oriented business (such as music and books). 
They know you need to keep trying lots of things and that you don't try 
to predict the hits, because you can't. 

Two economists proved that hits — at least in show biz — were unpre- 

38 / New Rules for the New Economy 

dictable. They plotted sales of first-run movies between May 1985 and 
January 1986 and discovered that "the only reliable predictor of a film's 
box office was its performance the previous week. Nothing else seemed 
to matter — not the genre of the film, not its cast, not its budget." 
The higher it was last week, the more likely it will be high this week — 
an increasing returns loop fed by word of mouth recommendations. 
The economists, Art De Vany and David Walls, claim these results 
mirror a heavy duty physics equation known as the Bose-Einstein distri- 
bution. The fact that the only variable that influenced the result was the 
result from the week before, means, they say, that "the film industry is 
a complex adaptive system poised between order and chaos." In other 
words, it follows the logic of the net: increasing returns and persistent 

Value Flows from Abundance 

Plentitude, not scarcity, governs the network economy. Duplication, 
replication, and copies run in excess. Whatever can be made, can be 
made in abundance. This plentitude: 

■ drives value 

■ works to open up closed systems 

■ spins offimmense numbers of opportunities 

Consider the first modern fax machine that rolled off the conveyor 
belt around 1965. Despite millions of dollars spent on its R&D, it was 
worth nothing. Zero. The second fax machine to be made immedi- 
ately made the first one worth something. There was someone to fax 
to. Because fax machines are linked into a network, each additional fax 
machine that is shipped increases the value of all the fax machines op- 
erating before it. 

This is called the fax effect. The fax effect dictates that plentitude 
generates value. 

So strong is this power of plentitude that anyone purchasing a fax 
machine becomes an evangelist for the fax network. "Do you have a 
fax?" fax owners ask you. "You should get one." Why? Because your 
purchase increases the worth of their machine. And once you join the 
network, you'll begin to ask others, "Do you have a fax (or email, or 
Acrobat software, etc.)?" Each additional account you can persuade to 
join the network substantially increases the value of your account. 

When you buy a fax machine, you are not merely buying a $200 box. 

40 / New Rules for the New Economy 

Your $200 purchases the entire network of all other fax machines in 
the world and the connections among them — a value far greater than 
the cost of all the separate machines. Indeed, the first fax machines 
cost several thousands of dollars and connected to only a few other 
machines, and thus were not worth much. Today $200 will buy you a 
fax network worth $3 billion. 

$1 ,000 

Buys $1 Million 


Buys $3 Billion 

The low price of a fax machine 
today buys you an entire 
network, consisting of eighteen 
million machines. Each 
additional unit sold increases 
the value of your machine. 

In the network economy, the more plentiful things become, the more 
valuable they become. 

This notion directly contradicts two of the most fundamental axi- 
oms we inherited from the industrial age. 

First hoary axiom: Value comes from scarcity. Take the icons of 
wealth in the industrial age — diamonds, gold, oil, and college degrees. 
These were deemed precious because they were scarce. 

Second hoary axiom: When things are made plentiful, they become 
devalued. For instance, carpets. They were once rare handmade items 
found only in houses of the rich. They ceased to be status symbols when 
they could be woven by the thousands on machines. The traditional law 
was fulfilled: commonness reduces value. 

The logic of the network flips this industrial lesson upside down. 
In a network economy, value is derived from plentitude, just as a fax 
machine's value increases as fax machines become ubiquitous. Power 
comes from abundance. Copies are cheap. Let them proliferate. 

Ever since Gutenberg made the first commodity — cheaply dupli- 
cated words — we have realized that intangible things can easily be 

Plentitude, Not Scarcity / 41 

copied. This lowers the value per copy. What becomes valuable is the 
relationships — sparked by the copies — that tangle up in the network 
itself. The relationships rocket upward in value as the parts increase in 
number even slightly. 

Windows NT, fax machines, TCP/IP, GIF images, RealAudio — all 
born deep in the network economy — adhere to this logic. But so do met- 
ric wrenches, triple-A batteries, and other devices that rely on universal 
standards. The more common they are, the more it pays you to stick to 
that standard. We have an even older example in the English language. 
Wherever the expense of churning out another copy becomes trivial (and 
this is happening in more than software), the value of standards and 
the network booms. 

In the future, cotton shirts, bottles of vitamins, chain saws, and the 
rest of the industrial objects in the world will also obey the law of plenti- 
tude as the cost of producing an additional copy of them falls steeply. 

Proprietary, or "closed," systems were once rare because indus- 
trial systems were relatively uncomplicated. Proprietary systems rose 
in popularity as advancing technology made it difficult to replicate a 
system without assistance or encroaching on patents. The creators of a 
closed system made a nice living. When the information economy was 
first launched several decades ago, the dream was to own and operate a 
proprietary system — one that no one else could copy — and then let the 
money roll in. To a degree that can still be done, at least for short pe- 
riod, if the system is significantly superior. Bloomberg terminals in Wall 
Street traders' offices is one current example. But the network economy 
rewards the plentitude of open systems more than the scarcity of closed 
systems. It is a bit of a cliche now to blame Apple's misfortunes on its 
insistence that its operating systems be treated as a scarce resource 
but it's true. Apple had more than one opportunity to license its par- 
ticularly wonderful interface — the now familiar desktop and windows 
design — but backed off each time, thereby guaranteeing its eventual 
eclipse by the relatively more open DOS and Windows systems. 

There is a place for isolation in the infancy of systems, but open- 
ness is needed for growth because it taps into a larger wealth. Citibank 
pioneered the use of 24-hour instant cash at ATMs in the 1970s. They 
blanketed New York City with their proprietary machines, and at first 
this strategy was highly successful. Smaller competing banks started 

42 / New Rules for the New Economy 

their own tiny and proprietary ATM networks, but they couldn't com- 
pete against the high penetration of Citibank machines. Then, led by 
Chemical Bank, these smaller banks banded together to form an open 
ATM network called Plus. The power of n 2 kicked in. Suddenly any ATM 
was your ATM. Citibank was invited to join the open Plus network but 
declined. Following the principle of increasing returns, the handy Plus 
system attracted more and more customers, and soon overwhelmed 
the once dominant Citibank. Eventually the open factor forced Citibank 
to forgo their proprietary ways and join. 

Every time a closed system opens, it begins to interact more directly 
with other existing systems, and therefore acquires all the value of 
those systems. 

In the mid 1980s I was associated with a pioneering online com- 
munity called the Well. You dialed the Well's special modem, and once 
logged on you could chat, post, and email anyone you wanted — within 
the Well. All 2,000 members. Within a short time after start-up the Well 
made a big jump and opened its mail service to the then-obscure inter- 
net. The value of the Well suddenly skyrocketed in the view of its 2,000 
or so members because now they could email thousands of academic 
professors or corporate nerds. A few years later, the Well further opened 
up its system to a capability called ftp, which allowed Well users to grab 
files on other internet servers and allowed others to grab files on the 
Well server. Again, the value of the Well exploded; with only a small ef- 
fort it gained the tremendous value of the entire ftp network. Eventually 
the Well opened up even further, allowing users to join the conversation 
via the web, thereby acquiring all the value of the web. 

There was a cost in each step. With every inclusion there was less 
control of the environment, more noise, more danger of disruption by 
accident or hacker, and more worry that the business model would col- 
lapse. At the same time it was obvious that a totally closed Well would 
have died. 

The idea of plentitude is to create something that has as many sys- 
tems and standards flowing through it as possible. The more networks 
a thing touches, the more valuable it becomes. 

Plentitude, Not Scarcity / 43 

The value of an invention, company, or technology increases exponen- 
tially as the number of systems it participates with increases linearly. 

The law of plentitude is not about dominance. The self-interest 
of ordinary business guarantees that every company in the world will 
strive to get its product or service into every home, or into every store. 
Popularity is an ancient goal. But that is not what network plentitude 
strives for. 

The abundance upon which the network economy is built is one of 

While it is true that every additional email address in the world in- 
creases the value of all previous email addresses (that's the primary 
effect of plentitude) the increase in value happens because each email 
address is a node of opportunity, not just an artifact. An email address 
is more than a way to exchange memos. Because email is rooted in a 
network, opportunity runs in several directions at once. For instance, 
once it was realized that mail addresses could be archived easily (op- 
portunity number one), it occurred to someone that they could be col- 
lected automatically (opportunity two). They could also be mailed to 
in bulk (opportunity three). The domain part of the address could be 
analyzed and used to detect patterns of usage (opportunity four). Ad- 
dresses in a Rolodex could be updated automatically by the addressee 
(opportunity five). The address artifact itself could contain more than 
just a name; it could also hold other facets of interests that the owner 

was willing to exchange in certain circumstances (opportunity six). 

A hammer is part of only a 
few networks, but a telephone 
is a part of many. The more 
networks a product or service 
can join, the more powerful it 

44 / New Rules for the New Economy 

Contrast this cascading abundance of opportunities with almost any 
product of the industrial age — say an electric rotary saw, or a color-fast 
dye, or a maplewood chair. While some of these objects have a few dual 
uses (the chair could be used as a step stool or to wedge a door open, 
and the saw motor could be used to drive a drill), they are pretty much 
limited to their designed intentions. There is no river of opportunities 
flowing from them. So that even if chairs, dye, and saws were to be- 
come universally abundant, their physical plentitude would not change 
the world much. 

The power of the fax effect — more fax machines increasing the value 
of all previous machines — does not rely on the proliferation of Pana- 
sonic brand fax machines, or of any particular machine. Since many 
faxes are sent from laptop computers, or from a server somewhere, the 
power of plenty derives from opportunities rather than lumps of mat- 

As opportunities proliferate, unintended uses take off. In the late 
1970s, the Shah of Iran exiled his rival, the Ayatollah Khomeini, to Paris. 
Since the Shah controlled his country's media he assumed Khomeini 
would not be able to reach the Iranian people from France to stir up 
trouble. But sympathetic Iranian clergy exploited an unsuspected tech- 
nological opportunity: the cassette tape. Every week in Paris Khomeini's 
friends recorded his inflammatory speeches on cheap recorders and 
smuggled copies (easily disguised as music tapes) into Iran, to be mul- 
tiplied on $200 duplication machines and passed out to every mosque. 
On Fridays, Khomeini's sermons were played throughout Iran on boom- 
boxes. The clerics turned the common tape deck into a broadcast net- 
work. I'm sure that not a single engineer who developed cassette tape 
technology ever envisioned it being used for broadcasting. Electronic 
media, because it is animated by electrons, is highly susceptible to be- 
ing subverted by new uses. 

Recently Sprint, the telecommunications company, pioneered flat 
cellular phone pricing — you could make all the cell phone calls you 
want for a fixed monthly fee. Within days of the pricing, the startled 
marketing experts at Sprint heard reports that people were using the 
cell phones as baby monitors. Parents would go into baby's bedroom 
with a cell phone, dial the kitchen, and then leave the line open. Voila! 

Plentitude, Not Scarcity / 45 

The more interconnected a technology is, the more opportunities it 
spawns for both use and misuse. 

Some of the best video games of all time were elegant little programs 
that ran on early computers such as the Commodore 64. Millions of 
C-64S were sold during the early 1980s; most of them lie at the bottom 
of landfills today. Their flealike memories and lack of disk space have 
been replaced by Powerbooks and Pentiums. The few still working are 
sold at collector's prices. But out on the web, filling niches no one could 
have predicted, are a flock of emulators. You can download a Commo- 
dore 64 emulator onto your Powerbook. At the click of a button it will 
turn your state-of-the-art workstation into a moronic C-64 (or one of 25 
other golden oldies) so you can play an ancient version of Moondust, 
or PacMan. This is equivalent to having a switch on the dashboard of 
your Ferrari to make it run like a VW Bug. 

These refreshing street uses for technology stem from the plenti- 
tude of interactions. Artifacts of the industrial economy yield limited 
potential for such weird, tangential uses. The network economy, on the 
other hand, is a cornucopia of products and innovations that cry out to 
be subverted in new ways. Indeed, in a network, new opportunities arise 
primarily when existing opportunities are seized. A business that suc- 
cessfully occupies a niche immediately creates at least two new niches 
for other businesses. There is, for example, no end to the number of 
companies that will find a niche in email; the more wild ideas that are 
created, the more wild ideas can be created. The arms race between 
spammers and readers is only in its infancy. 

The law of plentitude is most accurately rendered thus: In a network, 
the more opportunities that are taken, the faster new opportunities 

Furthermore, the number of new opportunities increases exponen- 
tially as existing opportunities are seized. Networks spew fecundity 
because by connecting everything to everything, they increase the num- 
ber of potential relationships, and out of relationships come products, 
services, and intangibles. 

46 / New Rules for the New Economy 

A standalone object, no matter how well designed, has limited po- 
tential for new weirdness. A connected object, one that is a node in a 
network that interacts in some way with other nodes, can give birth to a 
hundred unique relationships that it never could do while unconnected. 
Out of this tangle of possible links come myriad new niches for innova- 
tions and interactions. 

A network is a possibility factory. 

So tremendous is the fount of plentitude in the network economy 
that having to deal with nearly infinite choices and mushrooming pos- 
sibilities may be the limiting factor in the future. Navigating sanely 
through an expanding ocean of options is already difficult. The typical 
supermarket in America offers 30,000 to 40,000 products. The average 
shopper will zoom through the store in 21 minutes, and select out of 
those 40,000 choices about 18 items. This is an amazing feat of deci- 
sion making. But it is nothing compared to what happens on the web. 
There are one million indexed web sites, containing 250 million pages. 
To be able to find the right page out of that universe is astounding, 
and the number of pages doubles every year. Dealing with this plenti- 
tude is critical because the totals of everything we manufacture in the 
world are only compounding. The total amount of information stored 
in the entire world — that's counting all the libraries, film vaults, and 
data archives — is estimated to be about 2,000 petabytes. (A petabyte is 
a billion megabytes, or about a quadrillion books the size of this one.) 
That's a lot of bits. 

Plentitude will soon reach the level of zillionics. We know from 
mathematics that systems containing very, very large numbers of parts 
behave significantly different from systems with fewer than a million 
parts. Zillionics is the state of supreme abundance, of parts in the many 
millions. The network economy promises zillions of parts, zillions of ar- 
tifacts, zillions of documents, zillions of bots, zillions of network nodes, 
zillions of connections, and zillions of combinations. Zillionics is a 
realm much more at home in biology — where there have been zillions 
of genes and organisms for a long time — than in our recent manufac- 
tured world. Living systems know how to handle zillionics. Our own 
methods of dealing with zillionic plentitude will mimic biology. 

Plentitude, Not Scarcity / 47 

The network economy runs with plentitude. It vastly expands the 
numbers of things, increases the numbers of intangibles with ease, 
multiplies the numbers of connections exponentially, and creates new 
opportunities without number. 


Touch as many nets as you can. Because the value of an action in the 
network economy multiplies exponentially by the number of networks 
that action flows through, you want to touch as many other networks 
as you can reach. This is plentitude. You want to maximize the number 
of relations flowing to and from you, or your service or product. Imag- 
ine your creation as being born inert, like a door nail off a factory con- 
veyor belt. The job in the network economy is to link the nail to as many 
other systems as possible. You want to adapt it to the contractor sys- 
tem by making it a standard contractor size so that it fits into standard 
air-powered hammers. You want to give it a SKU designation so it can 
be handled by the retail sales network. It may want a bar code so it 
can be read by a laser-read checkout system. Eventually, you want it to 
incorporate a little bit of interacting silicon, so it can warn the door of 
breakage, and take part in the smart house network. For every additional 
system the nail is a part of, it gains in value. Best of all, the systems and 
all their members also gain in value from every nail that joins. 

And that's just for a stick of iron. More complex objects and services 
are capable of permeating far more systems and networks, thus greatly 
boosting their own value and the plentiful value of all the systems they 

Maximize the opportunities of others. In every aspect of your busi- 
ness (and personal life) try to allow others to build their success around 
your own success. If you run a hotel, what can you do to permit oth- 
ers — airlines, luggage retailers, tour guides — to be part of your net- 
work? Rather than viewing their dependency on your success as a form 
of parasitism, or worse, as a rip-off, understand this tight coupling 
as sustenance. You want to entice others to create services centered 
around the customer attention you have won, or to supply add-ons to 
your product, or even, if it is a new-fangled idea, to create legal imita- 

48 / New Rules for the New Economy 

tions. This is a counterintuitive stance at first, but it plays right into the 
logic of the net. A small piece of an expanding pie is the biggest piece 
of all. Software is especially primed to work this way. The programmers 
who created the hit game Doom deliberately made it easy to modify. The 
results: Hundreds of other gamers issued versions of Doom that were 
vastly better than the original, but that ran on the Doom system. Doom 
boomed and so did some of the derivatives. The software economy is 
full of such examples. Third-party templates for spreadsheets, word 
processors, and browsers make profits for both the third-party vendor 
and the host system. It takes only a bit of imagination to see how the 
leveraging of opportunities also works in domains outside of software. 
When confronted with a fork in the road, if all things are equal, go down 
the path that makes the opportunities of others plentiful. 

Don't pamper commodities; let them flow. The cost of replicating 
anything will continue to go down. As it does, the primary cost will be 
developing the first copy, and then getting attention to it. No longer will 
it be necessary to coddle most products. Instead they should be liber- 
ated to flow everywhere. Let's take pharmaceuticals, especially geneti- 
cally bio-engineered pharmaceuticals. The cost of little pills in the drug 
store can be hundreds of times greater than what they cost to produce 
in quantity, yet many drugs are priced expensively in order to recoup 
their astronomical development costs. Pharmaceutical companies treat 
and price their drugs as scarcities. One can expect, however, that in 
the future, as drug design becomes more networked, more data-driven, 
more computer mediated, and as drugs themselves become smarter, 
more adaptive, more animated, the competitive advantage will go to 
those companies that let "copies" of the drug flow in plentitude. For 
example, a highly evolved bioengineered headache relief drug may 
be sold for a few dollars on a "take as much as you need" basis. The 
company makes its profits when you pay it handsomely for tailoring 
that drug specifically for your DNA and your body. Once designed, you 
pay almost nothing for additional refills. Indeed there are already a few 
start-up biotech companies headed this way. The field is called pharma- 
genomics. They are heeding the call of plentitude. 

Avoid proprietary systems. Sooner or later closed systems have to 
open up, or die. If an online service requires dialing a special phone 
number to reach it, it's moribund. If it needs a special gizmo to read 

Plentitude, Not Scarcity / 49 

it, it's kaput. If it can't share what it knows with competing goods, it's 
a loser. Closed systems close off opportunities for others, making le- 
verage points scarce. This is why the network economy — which is bi- 
ased toward plenty — routes around closed systems. One could safely 
bet that America Online, WebTV, and Microsoft Network (MSN) — three 
somewhat closed systems — will eventually go entirely onto the open 
web, or disappear. The key issue in closed-versus-open isn't private ver- 
sus public, or who owns a system; often private ownership can encour- 
age innovation. The issue is whether it is easy or difficult for others to 
invent something that plays off your invention. The strategic question 
is simple: How easy is it for someone outside of the host company to 
contribute an advance to their system or product or service? Are the op- 
portunities for participating in your own network scarce or plentiful? 

Don't seek refuge in scarcity. Every era is marked by the wealth of 
those who figure out what the new scarcity is. There will certainly be 
scarcities in the network economy. But far greater wealth will be made 
by exploiting the plentitude. To make sure you are not seeking refuge 
in scarcity, ask yourself this question: Will your creation thrive if it 
becomes ubiquitous? If its value depends on only a few using it, you 
should reconsider it in light of the new rules. 


Why the Net Rewards Gener- 

The very best gets cheaper each year. This principle is so ingrained in 
our lifestyle that we bank on it without marveling at it. But marvel we 
should, because this paradox is a major engine of the new economy. 

Before the industrial age, consumers could expect only slight im- 
provements in quality for slight increases in price. Over the years the 
improved cost more. But with the arrival of automation and cheap en- 
ergy in the industrial age, manufacturers could invert the equation: They 
offered lower costs and increased quality. Between 1906, when autos 
were first being made, and 1910, only four years later, the cost of the av- 
erage car had dropped 24%, while its quality rose by 31%. By 1918, the 
average car was 53% cheaper than its 1906 counterpart, and 100% bet- 
ter in performance quality. The better-gets-cheaper magic had begun. 

The arrival of the microprocessor accelerated this wizardry. In the 
information age, consumers quickly have come to count on drastically 
superior quality for drastically reduced price over time. A sensible rec- 
ommendation to anyone asking for shopping advice today is that they 
should delay buying a consumer good until about 60 seconds before they 
actually need it. Indeed, a transportation specialist told me that almost 
nothing in the information industry is shipped by sea anymore; it all goes 
by air, so the price won't have a chance to drop while the product is in 

So certain is the plummet of prices that economists have mapped 
the curve of their fall. The cost of making something — whether it is 
steel, light bulbs, airplanes, flower pots, insurance policies, or bread — 

Follow the Free / 51 

will drop over time as a function of the cumulative number of units pro- 
duced. The more an industry makes, the better it learns how to make 
them, the more the cost drops. The downward price curve, propelled by 
organizational learning, is sometimes called the learning curve. Although 
it varies slightly in each industry, generally doubling the total output of 
something will reduce the unit cost on average by 20%. 

Smart companies will anticipate this learning curve. Very smart 
companies will accelerate it by increasing volumes, one way or another. 
Since increasing returns can exponentially expand the demand of items — 
doubling their totals in months — network effects speed the steep fall of 

Computer chips further compound the learning curve. Better chips 
lower the cost of all manufactured goods, including new chips. Engi- 
neers use the virtues of computers to directly and indirectly create the 
next improved version of computers, quickening the rate at which chips 
are made, and their prices drop, which speed the rate at which all goods 
become cheaper. Around a circle the virtues go. 

Feedback loops saturate networks. Since so many people and ma- 
chines are interlinked in overlapping feedback loops, virtuous circles 
form. One, two, three, four, it all adds up to more. 

■ Expanding knowledge makes computers smarter. 

■ As computers get smarter we transfer some of that intelligence to the 
production line, lowering costs of goods and raising their perfection — 
including chips. 

■ Cheaper chips lower the cost of setting up a competing enterprise, 
so competition and spreading knowledge lowers the prices yet more. 

■The know-how of cheapness spreads throughout industry quickly 
and makes its way back to the creation of better/cheaper chip and com- 
munication tools. 

That virtuous circle feeds itself voraciously. So potent is compound- 
ing chip power that everything it touches — cars, clothes, food — falls 
under its spell. Prices dip and quality rises in all goods; not mildly, but 
precipitously. For example, between 1971 and 1989 a standard 17-cubic 
foot refrigerator declined in price by a third (in real dollars) while be- 

52 / New Rules for the New Economy 

coming 27% more energy efficient and sporting more features, such as 
ice-making. In 1988 Radio Shack listed a cellular phone for $1,500. Ten 
years later they list a better one for $200. 

Most of the increase in value we've seen in products comes from the 
power of the chip. But in the network economy, shrinking chip meets 
exploding net to create wealth. Just as we leveraged compounded learn- 
ing in creating the microprocessor revolution, we are leveraging the 
same amplifying loops in creating the global communications revolu- 
tion. We can now harness the virtues of networked communications to 
directly and indirectly create better versions of networked communica- 
tions. When quality feeds on itself in such a manner, we witness discon- 
tinuous change: in this case, a new economy. 

Almost from their birth in 1971, microprocessors experienced steep 
inverted pricing. The chip's pricing plunge is called Moore's Law, af- 
ter Gordon Moore, the Intel engineer who first observed the amaz- 
ing, steady increase in computer power per dollar. Moore's Law states 
that computer chips are halving in price, or doubling in power every 18 
months. Now, telecommunications is about to experience the kind of 
plunge that microprocessor chips have taken — but even more drasti- 
cally. The net's curve is called Gilder's Law, for George Gilder, a radical 
technotheorist, who forecasts that for the foreseeable future (the next 
10 years), the total bandwidth of communication systems will triple ev- 
ery 12 months. 

The conjunction of escalating communication power with shrink- 
ing size of jelly bean nodes at collapsing prices leads Gilder to speak 
of bandwidth becoming free. What he means is that the price per bit 
transmitted drops down toward the free. What he does not mean is 
that telecom bills drop to zero. Telecom payments are likely to remain 
steady per month in real dollars as we consume more bits, just as those 
bits sink in cost. 

The cost per bit sinks so low, however, that the per unit cost to the 
consumer closes in on the free. The cost follows what is called an as- 
ymptotic curve. In an asymptotic curve the price point forever nears 
zero without ever reaching it. It is like Zeno's tortoise: with each step 
forward, the tortoise gets halfway closer to the limit but never actually 
crosses it. The trajectory of an asymptotic curve is similar. It so closely 
parallels the bottom limit of free that it behaves as if it is free. 

Follow the Free / 53 

Because prices move inexorably toward the free, the best move in 
the network economy is to anticipate this cheapness. 

So reliable is the arrival of cheapness in the new economy that a per- 
son can make a fortune anticipating it. One of the classic tales of count- 
ing on the cheap comes from the information era's Big Bang — when 
the semiconductor transistor was born. 

In the early 1960s Robert Noyce and his partner Jerry Sanders — 
founders of Fairchild Semiconductor — were selling an early transistor, 
called the 1211, to the military. Each transistor cost Noyce $100 to make. 
Fairchild wanted to sell the transistor to RCA for use in their UHF tuner. 
At the time RCA was using fancy vacuum tubes, which cost only $1.05 
each. Noyce and Sanders put their faith in the inverted pricing of the 
learning curve. They knew that as the volume of production increased, 
the cost of the transistor would go down, even a hundredfold. But to 
make their first commercial sale they need to get the price down imme- 
diately, with zero volume. So they boldly anticipated the cheap by cut- 
ting the price of the 1211 to $1.05, right from the start, before they knew 
how to do it. "We were going to make the chips in a factory we hadn't 
built, using a process we hadn't yet developed, but the bottom line: We 
were out there the next week quoting $1.05," Sanders later recalled. 
"We were selling into the future." And they succeeded. By anticipating 
the cheap, they made their goal of $1.05, took 90% of the UHF market 
share, and then within two years cut the price of the 1211 to 50 cents, 
and still made a profit. 

In the network economy, chips and bandwidth are not the only 
things headed toward the asymptotic free. Calculation is too. The cost of 
computation — as measured by the millions of calculations per second 
per dollar — is headed toward the free. Transaction costs also dive toward 
thefree. Information itself — headlinesand stockquotes — plunges toward 
the free, too. Real-time stock quotes, for instance, were once high-priced 
insider information. Lately they have become so widely available that 
they must conform to a stock quote "spec" so that generic web brows- 
ers can read them uniformly. 

54 / New Rules for the New Economy 

Indeed, all items that can be copied, both tangible and intangible, 
adhere to the law of inverted pricing and become cheaper as they 

While it is true that automobiles will never be free, the cost per mile 
of driving will dip toward the free. It is the function (moving the body) 
per dollar that continues to drop. This distinction is important. Because 
while the function costs head toward zero, the expenditure share can 
remain steady, or even balloon. With cheaper costs we travel more, way 
more. With cheaper computation we consume billions of more calcula- 
tions. Yet for vendors to make a profit, they must anticipate this cheap- 
ening per unit. 

Let's take communications. All-you-can-use plain old telephone ser- 

Gilder's Law says that the cost 
per communication bit will 
begin to sink farther than it has 
fallen previously. Eventually the 
cost of a telephone call, or of a 
bit transmitted, will be "free." 

vice with no frills will soon be essentially free. But as customers use more 
of this nearly free service, they quickly add options and deluxe services. 
First, every room gets a phone line. Then your car gets a line, or two. 
Then you get a mobile line. Then everyone in the family gets a mobile. 
Then answering service. Then call forwarding, call waiting, caller ID. Then 
fax and modem lines. Then all appliances and objects get a line. Then 
continuous open lines to cash registers, and credit card readers. Then 
security lines. Then ISDN and ADSL lines. Then caller ID blocking. Then 
junk call blocking. Then vanity phone numbers. Then portable personal 
numbers. Then voice mail sorting. 

The outer boundaries of telephony keep expanding. When the phone 
was first invented, there was much confusion about what in the world it 
was good for commercially. Some thought it would be used to transmit 

Follow the Free / 55 

music into homes. But even the most ambitious booster didn't envi- 
sion having five phones lines in their home (as I do). The desire to have 
a phone in a car and to have caller ID was manufactured, indirectly, by 
the technology itself. 

Technology creates an opportunity for a demand, and then fills it. 

This is a very different notion of supply and demand from the one 
diagrammed in the introductory chapters of any economics textbook. 
The traditional supply and demand curve conveys a simple lesson: As a 
resource is consumed, it becomes more expensive to produce. For in- 
stance, as gold is mined, the easy (cheap) nuggets are found first; but to 
mine little particles of gold out of 25 tons of rock requires a higher gold 
price to make the effort worthwhile. Therefore, the supply curve slopes 
up, with the potential supply increasing as the price goes up. In con- 
trast, the traditional understanding of demand says that demand slacks 
off the more supply there is. If you have lobster on Monday, Tuesday, 
and Wednesday, you'll be less interested in having it again and more in- 
clined to pay less for lobster on Thursday. Therefore, the demand curve 
slopes down, with prices dropping as a product becomes abundant. 

In the new order, as the law of plentitude kicks in and the nearly free 
take over, both of these curves are turned upside down. Paul Krugman, 

In textbook economics the 
supply of products would only 
increase if their price went 
up; in the new economics the 
supply increases as price goes 

an economist at MIT, says that you can reduce the entire idea of the 
network economy down to the observation that "in the Network Econ- 
omy, supply curves slope down instead of up and demand curves slope 
up instead of down." The more a resource is used, the more demand 

56 / New Rules for the New Economy 

there is for it. A similar inversion happens on the supply side. Because 
of compounded learning, the more we create something, the easier it 
becomes to create more of it. The classic textbook graph is inverted. 

As the supply curve rockets upward exponentially and the demand 
curve plunges further, the new Supply/Demand Flip suggests the two 
curves will cross each other at lower and lower price points. We see this 
already as the prices of goods and services keep heading toward the 
free. But hidden between the curves is a momentous surprise. Supply 
and demand are no longer driven by resource scarcity and human de- 
sire. Now both are driven by one, single exploding force: technology. 

The accelerating expansion of knowledge and technology simulta- 
neously pushes up the demand curve while pushing down the supply 
curve. One very potent force shifts both sides. 

The effectiveness of technology in driving down prices is easy to ap- 
preciate. As stated at the beginning of this chapter, price drops have 
been going on for a while, although now it is accelerating. We know the 
outcome of this trend: lower prices everywhere. Consumers rejoice. But 
how are companies to make a profit in a world of constantly sinking 
prices? In the supply. Technology and knowledge are driving up demand 
faster than it is driving down prices. And demand, unlike prices, has no 
asymptote to limit it. The extent of human needs and desires is limited 
only by human imagination, which means, in practical terms, there is 
no limit. The quicker the price of transportation drops, the more qual- 
ity and services and innovation are embedded into cars, planes, and 
trains, lifting the quality of the "wants" they satisfy. 

Anything that can be replicated 
will have a price that will tend 
toward zero, or free. While the 
cost may never reach free, it 
approaches the free in a curve 
called an asymptote. 

Follow the Free / 57 

Over time, any product is on a one-way trip over the cliff of inverted 
pricing and down the curve toward the free. As the network economy 
catches up to all manufactured items — from cell phones to sofas — they 
will all slide down this slope of decreasing price more rapidly than ever. 

The task, then, is to create new things to send down the slide — in 
short, to invent items and services faster than they are commoditized. 

This is easier to do in a network-based economy because the criss- 
crossing of ideas, the hyperlinking of relationships, the agility of alli- 
ances, and the nimble quickness with which new nodes are created all 
support the constant generation of new goods and services. 

We will create artifacts and services rapidly, as if they were short- 
lived bubbles. Since we can't hold back a bubble's drift toward popping, 
we can only learn to make more bubbles, faster. 

If goods and services become more valuable as they become more 
plentiful, and if they become cheaper as they become valuable, then the 
natural extension of this logic says that the most valuable things of all 
should be those that are ubiquitous and free. 

Ubiquity drives increasing returns in the network economy. The 
question becomes, What is the most cost-effective way to achieve ubiq- 
uity? And the answer is: give things away. Make them free. 

Indeed, we see many innovative companies in the new economy fol- 
lowing the free. Microsoft gives away its Internet Explorer web browser. 
Netscape also gives away its browser, as well as its valuable source 
code. Qualcomm, which produces Eudora, the popular email program, 
is given away as freeware in order to sell upgraded versions. Thomson, 
the $8 billion-a-year publisher, is giving away its precious high-priced 
financial data to investors on the web. Some one million copies of 
McAfee's antivirus software are distributed free each month. And, of 
course, Sun passed Java out gratis, sending its stock up and launching 
a mini-industry of Java application developers. 

Can you imagine a young executive in the 1940s telling the board 
that his latest idea is to give away the first 40 million copies of his only 
product? (Fifty years later that's what Netscape did.) He would not have 

58 / New Rules for the New Economy 

lasted a New York minute. 

But now, giving away a product is a tested, level-headed strategy 
that banks on the network's new rules. Because compounding network 
knowledge inverts prices, the marginal cost of an additional copy (in- 
tangible or tangible) is near zero. It cost Netscape $30 million to ship 
the first copy of Navigator out the door, but it cost them only $1 to ship 
the second one. Yet because each additional copy of Navigator sold in- 
creases the value of all the previous copies, and because the more value 
the copies accrue, the more desirable they become, it makes a weird 
kind of economic sense to give them away at first. Once the product's 
worth and indispensability is established, the company sells auxiliary 
services or upgrades, continuing its generosity to involve more custom- 
ers in a virtuous circle. 

One might argue that this frightening dynamic works only with soft- 
ware, since the marginal cost of an additional copy is already near zero 
(now that software can be distributed online). But "following the free" 
is a universal law. Hardware, when networked, also follows this man- 
date. Cellular phones are given away in order to sell cell phone services. 
We can expect Direct-TV dishes to be given away for the same reasons. 
This principle applies to any object whose diminishing cost of replica- 
tion is exceeded by the advantages of being plugged in. 

As crackpot as it sounds, in the distant future nearly everything we 
make will (at least for a short while) be given away free — refrigerators, 
skis, laser projectors, clothes, you name it. This will only make sense 
when these items are pumped full of chips and network nodes, and 
thus capable of delivering network value. 

The natural question is how companies are to survive in a world of 
such generosity? Three points will help. 

First, think of "free" as a design goal for pricing. There is a drive 
toward the free — the asymptotic free — that, even if not reached, makes 
the system behave as if it has been reached. A very cheap rate can have 
an effect equivalent to being outright free. 

Second, pricing a core product as free positions other services to be 
expensive. Thus, Sun gives Java away to help sell servers, and Netscape 
hands out consumer browsers to help sell commercial server software. 

Third, and most important, following the free is a way to rehearse a 
service's or a good's eventual fall to free. You structure your business 

Follow the Free / 59 

as if the thing that you are creating is free in anticipation of where its 
price is going. Thus, while Sega game consoles are not free to consum- 
ers, they are sold as loss leaders to accelerate their journey toward their 
eventual destiny — to be given away in a network economy. 
Another way to view this effect is in terms of attention: 

The only factor becoming scarce in a world of abundance is 
human attention. 

As Nobel-winning economist Herbert Simon puts it: "What infor- 
mation consumes is rather obvious: It consumes the attention of its re- 
cipients. Hence a wealth of information creates a poverty of attention." 
Each human has an absolute limit of 24 hours per day to provide atten- 
tion to the millions of innovations and opportunities thrown up by the 
economy. Giving stuff away captures human attention, or mind share, 
which then leads to market share. 

Following the free also works in the other direction. If one way to 
increase product value is to make products free, then many things now 
free may contain potential value not yet perceived. We can anticipate 
the eruption of new wealth on the frontier by tracking down the free. 

In the web's early days, the first indexes to this uncharted territory 
were written by students and given away. The indexes helped people 
focus their attention on a few sites out of the thousands available. 
Webmasters, hoping to draw attention to their sites, aided the index- 
ers' efforts. Because they were free, indexes became ubiquitous. Their 
ubiquity quickly made them valuable (and their stockholders rich) and 
enabled many other web services to flourish. 

What is free now that may later lead to extreme value? Where to- 
day is generosity preceding wealth? A short list of online candidates 
would be digesters, guides, catalogers, FAQs, remote live cameras, 
front page web splashes, and numerous bots. Free for now, each of 
these will someday have profitable companies built around them sell- 
ing auxiliary services. Digesting, guiding and cataloging are not fringe 
functions, either. In the industrial age, a digest, Reader's Digest, was the 
world's most widely read magazine; a guide, TV Guide, was more profit- 
able than the three major networks it guided viewers to; and a catalog 
of answers, the Encyclopaedia Britannica, began as a compendium of 

60 / New Rules for the New Economy 

articles written by amateurs — something like online FAQs (Frequently 
Asked Questions). 

But the migration from ad hoc use to commercialization cannot be 
rushed. To reach ubiquity you need to pass through sharing. 

Increasingly we see technologies pass through a protocommercial 
stage. Huge numbers of people, exerting millions of hours of collective 
effort, will jointly craft hundreds of thousands of creations, but with- 
out the exchange of money. An entire society following the free! Author 
Lewis Hyde long ago called this arrangement a gift economy. The central 
task in a gift economy is to keep the gifts moving. By social debt, barter, 
and pure charity, gifts circulate and generate happiness and wealth. 

The early internet and the early web sported amazingly robust gift 
economies. Text and expertise (FAQs, for example) and services (page 
designs) were swapped, shared generously, or donated outright. Infor- 
mation was bartered, content was given away, code was exchanged. For 
a long while the gift economy was the only way to acquire things on- 
line. In the first 1,000 days of the web's life, several hundred thousand 
webmasters created over 450,000 web sites, thousands of virtual com- 
munities, and 150 million pages of intellectual property, primarily for 
free. And these protocommercial sites were visited by 30 million people 
around the world, with 50% of them visiting daily, staying for an average 
of to minutes per day. This is a raging success by almost any measure 
you'd want to use. No other emerging media in the past experienced 
such glory so early in its growth. 

Talk of generosity, of information that wants to be free, and of virtual 
communities is often dismissed by businesspeople as youthful new age 
idealism. It may be idealistic but it is also the only sane way to launch a 
commercial economy in the emerging space. "The web's lack of an ob- 
vious business model right now is actually its main event," says Stewart 
Brand, of the Global Business Network. 

When a sector of the new economy passes through the protocom- 
mercial phase, it is the opposite of the "tragedy of the commons." The 
tragedy of the commons was that nobody took responsibility for main- 
taining the communal pastures that were the livelihood for the entire 
community. In the follow-the-free economy that seems to precede com- 

Follow the Free / 61 

mercial activity on the net, everyone keeps the commons up because 
nobody is able to make a living from it on their own. Sophisticated soft- 
ware, as good as anything you can purchase, is written, debugged, sup- 
ported, and revised for free in this "triumph of the commons." 

The most popular software used to run web sites is called Apache. It 
is not sold by Netscape, or Microsoft, or anyone. Apache, which has 47% 
of the server market (Microsoft has 22% and Netscape 10%), was writ- 
ten (and is maintained) by a network of volunteers. It is given away free. 
Apache, which is used by the developers of such commercial sites as 
McDonald's, keeps getting better because the triumph of the commons 
rewards a completely open product: Anyone has access to Apache's 
software source code and can improve it. "If you give everyone source 
code, everyone becomes your engineer," says John Gage, chief scientist 
at Sun Microsystems. 

The most popular operating system for web server workstations is 
not sold by anyone. It is a product called Linux, a Unix-compatible pro- 
gram that was originally written by Linus Torvalds, and given away for 
free. In the manner of building medieval cathedrals, hundreds of soft- 
ware engineers volunteer their time and expertise to refine and improve 
Linux, and to keep it free. Beside Apache and Linux, there are many 
other free software suites, such as Perl and X-Windows, maintained 
by a network of programmers. The engineers don't get paid in money; 
rather they get better tools than they can buy, tools that can be eas- 
ily tweaked by them for maximum performance, tools superior to what 
they can make alone, and tools that increase in network value, since 
they are given away. 

Tens of thousands of software programs written for almost every 
imaginable use are available on the net for free. Called shareware, the 
model is simple. Download whatever software you want for free, try it 
out, and if you like it, send some money to the author. Dozens of en- 
trepreneurs have made their million dollars selling goods by this pro- 
tocommercial method. More and more, the triumph of the commons 
overrides orthodox business models. 

As Stewart Brand says, the main event of the emerging World Wide 
Web is its current absence of a business model in the midst of astound- 
ing abundance. The gift economy is one way players in the net rehearse 
for a life offol lowing the free and anticipating the cheap. This is also a way 

62 / New Rules for the New Economy 

for entirely new business models to shake out. Furthermore the pro- 
tocommercial stage is a way for innovation to fast-forward into hyper- 
drive. Temporarily unhinged from the constraints of having to make 
a profit by next quarter, the greater network can explore a universe of 
never-before-tried ideas. Some ideas will even survive the transplanta- 
tion to a working business. 

It's a rare (and foolish) software outfit these days that does not in- 
troduce its wares into the free economy as a beta version in some fash- 
ion. Fifty years ago the notion of releasing a product unfinished — with 
the intention that the users would help complete it — would have been 
considered either cowardly, cheap, or inept. But in the new regime, this 
precommercial stage is brave, prudent, and vital. 

Releasing incomplete "buggy" products is not cost-cutting des- 
peration; it is the shrewdest way to complete a product when your 
customers are smarter than you are. 

The protocommercial state and the triumph of the commons is in 
ascendance. It is no coincidence that increasing numbers of internet 
companies take themselves public before they are profitable. Investors 
are purchasing shares in a firm with protocommercial value. The old 
guard reads this as a signal of greed, speculation, and hype. But it also 
signals that many of the components of the gift economy — attention, 
community, standards, and shared intelligence — have to be in place 
before cold-cash commercialization can kick in. The gift economy is a 
rehearsal for the radical dynamics of the network economy. 


What can you give away? This is the most powerful question in this 
book. You can approach this question in two ways: What is the closest 
you can come to making something free, without actually pricing it at 
zero? Or, in a true gesture of enlightened generosity, you can figure out 
how to part with something very valuable for no monetary return at all. 
If either strategy is pursued with intelligence, the result will be the same. 
The network will magnify the value of the gift. But giving something 

Follow the Free / 63 

away is not usually easy. It must be the right gift, given in the proper 
context. To figure out what to give away, consider these questions: 

■ Is the freebie more than a silly premium, like the toy in a cereal 
box? There is no power in the gift unless it is crucial to your business. 

■ What virtuous circle will this freebie circulate in? Is it the loop you 
most need to amplify? 

■In the long run, the unbounded support of a customer is more 
valuable than a fixed amount of their money. How will you eventually 
capture the support of customers if there is initially no flow of money? 

Every organization harbors at least one creation — or potential 
creation — that can be liberated into "free-dom." This is often an idea 
with problems, particularly with its price: Should it be $69.50 per min- 
ute or $6.50 per box? The answer sometimes is: It should be free. Even 
if the idea is never actualized, my experience is that the very act of con- 
templating the free will inevitably illuminate all kinds of beneficial attri- 
butes that were never visible before. "Free" has long been a taboo price 
point. Perhaps because it has been forbidden, many low-hanging fruit 
are waiting to be plucked by giving the free serious consideration. 

Act as //your product or service is free. Magazine publishers do 
this. The cover price on a magazine barely covers the cost of printing 
it, so publishers act as if they were giving it away (and some actually 
do). They make their money instead on advertising. Says pundit Esther 
Dyson, "The creator who immediately writes off the costs of developing 
content — as if it were valueless — is always going to win over the creator 
who can't figure out how to cover those costs." Memberships in serious 
discounters such as Cendant are also "as if free." Cendant "gives away" 
the merchandise very near the cost of manufacturing, as if the stuff were 
free. They make the bulk of their profits not from selling goods to its 
members — who get fantastic retail prices — but from selling $40 per 
year membership fees. 

Invest in the first copy. That is the only one that will hurt. The 
second copy and all thereafter will head toward the free, but the first 
will become increasingly more expensive and capital intensive. Gordon 
Moore, of Moore's Law fame, posed a second law: that the costs of in- 
venting chips (that are halving in cost every 18 months) is doubling every 

64 / New Rules for the New Economy 

three to four years. The up-front investment for research, design, and pro- 
cess invention for all complex endeavors are commanding a larger share 
of the budget, while the capital costs of subsequent copies diminishes. 

Anticipate the cheap. What would you do if your current offerings 
cost only one third what they cost today? They will someday soon, so 
create models that recognize this trend. 

Turn off the meter, charge for joining. Flat or monthly fixed pricing 
is one way of pricing "as if free." Fees are paid, but there is no meter 
running. This tactic can be abused by the company (a la cable TV) or 
can be abused by the consumer (a la AOL). A flat fee is one type of sub- 
scription. Subscriptions are well-honed tools used by the soft world of 
magazines and theater, among others. Could subscriptions really apply 
to old order physical products, like say, food? The idea of subscribing 
to food is not so outlandish. Forty years ago subscriptions to milk were 
quite common. There were also subscriptions to bread and beer and 
other staples. Subscriptions tend to emphasize and charge for intangi- 
ble values: regularity, reliability, first to be served, and authenticity, and 
work well in the arena of "as if free." 

The ancillary market is the market. The software is free, but the man- 
ual is $10,000. That's no joke. Cygnus Solutions, based in Sunnyvale, 
California, rakes in $20 million per year in revenues selling support for 
free Unix-like software. Apache is free but you can buy support and up- 
grades from C2Net. Although Novell, the network provider, does sell 
network software, that's not what they are really selling, says Esther Dy- 
son: "What Novell Inc. really is selling is its certified NetWare engineers, 
instructors, and administrators, and the next release of NetWare." One 
educational software exec admitted that his company's help line was 
actually an important profit center. Their main market was the ancillary 
products they sold for their flagship software, which they had a chance 
to do while helping customers. 

Pinpoint where value is being given out for free now, and then follow 
up. The next Netscape, the next Yahoo, the next Microsoft is already up 
and running, and they are giving their stuff away for free. Find them, 
and hitch your wagon to their star. Look for the following tricks: charges 
only for ancillaries, as-if-free behavior, memberships, and outright gen- 
erosity. If they are using the free to play off network effects, they are the 
real McCoys. 


Members Prosper as the Net 

The distinguishing characteristic of networks is that they contain no 
clear center and no clear outside boundaries. Within a network every- 
thing is potentially equidistant from everything else. 

Therefore the first thing the network economy reforms is our 

The vital distinction between the self (us) and the nonself (them) — 
once exemplified by the fierce loyalty of the organization man in the in- 
dustrial era — becomes less meaningful in a network economy. The only 
"inside" now is whether you are on the network or off. 

Individual allegiance moves away from firms and toward networks 
and network platforms. 

Are you Windows or are you Mac? 

This shift to network loyalty makes the potential of any network we 
might want to join a key issue. Is the network waxing or waning? Is 
the upside potential meager or tremendous? Is the network open or 

When given the choice between closed or open systems, consumers 
show a fierce enthusiasm for open architectures. They choose the open 
again and again because an open system has more potential upside 
than a closed one. There are more sources from which to recruit mem- 
bers and more nodes with which to intersect. 

66 / New Rules for the New Economy 

Identifying the preferred network to do business in is now a major 
chore for firms. Because more and more of a firm's future lies in its net- 
works, firms must evaluate a network's relative open- and closedness, 
its circulation, its ability to adapt. Consultant John Hagel says, "A web 
limits risk. It allows companies to make irreversible investments in the 
face of technological uncertainty. Companies in a web enjoy expanding 
sourcing and distribution options, while their fixed investment and skill 
requirements fall." 

As the destiny of firm and web intertwine, the health of the matrix 
becomes paramount. 

Maximizing the value of the net itself soon becomes the number 
one strategy for a firm. For instance, game companies will devote as 
much energy to promoting the platform — the tangle of users, game 
developers, and hardware manufacturers — as they do to their games. 
For unless their web thrives, they die. This represents a momentous 
change — a complete shift in orientation. Formerly, employees of a firm 
focused their attention on two loci: the firm itself and the marketplace. 

The prosperity of a firm is 
directly linked to the prosperity 
of its network. As the platform 
or standard it operates on 
flourishes, so does the firm. 

Now there is a third horizon to consider: the network. The network 
consists of subcontractors, vendors and competitors, emerging stan- 
dards for exchanges, the technical infrastructure of commerce, and the 
web of consumers and clients. 

Commerce networks can be thought of as ecologies. Economist 
Brian Arthur states: "Players compete not by locking in a product on 
their own but by building webs — loose alliances of companies organized 

Feed the Web First / 67 

around a mini-ecology — that amplify positive feedbacks to the base 

During certain phases of growth, feeding the network is as important 
as feeding the firm. Some firms that already have large market shares 
(such as Intel, which owns 80% of the PC processor market) channel 
money, through minority investments, to younger firms whose success 
will strengthen the market for their products, directly or indirectly. They 
feed the web because it is good business. 

In the network economy a firm's primary focus shifts from maximiz- 
ing the firm's value to maximizing the network's value. 

Not every network demands the same investment. The music CD 
standard and web of suppliers is well entrenched by now. The new DVD 
video standard is not. A publishing company issuing music on a CD has 
to devote less energy to making sure the CD platform flourishes than 
does a movie company issuing their film on a DVD. The film company 
must devote substantial resources to ensuring the spread and survival 
of this emerging platform. They'll work with the hardware manufactur- 
ers, maybe share costs of advertising by seeding the platform logo in 
their own ads, send reps to technical committees, and cooperate with 
other film studios in getting the new format accepted. The music com- 
pany doesn't need to make as heavy an investment with CDs. But they 
do need to make investments into new networks if they try to deliver 
music online — because online delivery is still in its embryonic phase. 

Every network technology follows a natural life cycle, roughly broken 
into three stages: 

■ Prestandard 

■ Fluid 

■ Embedded 

A firm's strategy will depend on what phase a network is in. 

The prestandard phase is the most exciting. This period is marked 
by tremendous innovation, high hopes, and grand ambition. "Aha!" 
ideas flow readily. Since there are no experts, everyone can compete, 
and it seems as if everyone does. Easy entry into the field draws myriad 

68 / New Rules for the New Economy 

players. For instance, when telephone networks began, there were few 
standards and many contenders. In 1899, there were 2,000 local tele- 
phone firms in the American telephone network, many of them run- 
ning with their own standards of transmission. In a similar vein, in the 
1890s, electricity came in a variety of voltages and frequencies. Each 
local power plant chose one of many competing standards for electri- 
cal power. Transportation networks, ditto. As late in the railroad era as 
1880, thousands of railway companies did not share a universal gauge. 

Two examples of networks in the prestandard stage today are online 
video and e-money. You have the choice of many competing protocols 
with equal prospects. With both domains, the uncertainty level is high, 
but the consequences of being wrong are minimal. Little is locked in, so 
it's easy to change. 

Networks in the fluid phase have a different dynamic. The plethora 
of choices in the prestandard phase gradually reduces to two or three. 
Allegiances are mobile, and drift over time. During this period, net- 
works demand the strongest commitment to their survival. Participants 
have to feed the web of their choice first, and the narrowing of choices 
allows substantial investment to spur rapid growth. The effects of plen- 
titude and increasing returns kick in — more breeds more. Feeding the 
web on any of several standards still produces gains for all participants. 
Yet it is inevitable that only one standard will ultimately prevail while 
the other ones fail. The uncertainty level is nearly as high as during the 
prestandard phase, but the risks for being wrong are greater. Anyone 
who remembers the demise of 8-track audiotapes will appreciate the 
perils of this painful stage. Today such networks as digital photographs 
and desktop operating systems are in this fluid phase: Several well-es- 
tablished standards vie for ultimate dominance. Choose wisely! 

The final stage in the life cycle of networks is the embedded phase, 
where one standard is so widely accepted that it becomes embedded 
in the fabric of the technology and is thereafter nearly impossible to 
dislodge — at least as long as the network exists. Regular no-volt AC 
power is well embedded at this point (although, as the power grid be- 
comes global, there could be some surprises). ASCII text is likewise 
deeply embedded — at least for phonetic languages. Some of the con- 
ventions of voice dial tone are so ubiquitous worldwide as to be perma- 

Feed the Web First / 69 

In any phase of innovation — prestandard, fluid, or embedded — 
standards are valuable because they hasten innovation. Agreements are 
constraints on uncertainty. The constraints of a standard solidify one 
pathway out of many, allowing further innovation and evolution to ac- 
celerate along that stable route. So central is the need to cultivate cer- 
tainty that organizations must make the common standard their first 
allegiance. As standards are established, growth takes off. 

For maximum prosperity, feed the web first. 

Arriving at standards is often easier said than done. Standard-mak- 
ing is a torturous, bickering process every time. And the end result is 
universally condemned — since it is the child of compromise. But for a 
standard to be effective, its adoption must be voluntary. There must be 
room to dissent by pursuing alternative standards at any time. 

Standards play an increasingly vital role in the new economy. In the 
industrial age, relatively few products demanded standards. You didn't 
need a consensual network to make a chair and table. If you obeyed 
some basic ergonomic conventions — make table height 30 inches — you 
were on your way. Those industrial products that operated in networks — 
such as the electrical or transportation networks — demanded sophisti- 
cated standard-making. Anything plugged into the electrical grid had to 
be standard. Automobiles manufactured by separate factories shared 
standards on such things as axle width, fuel mixtures, placement of turn 
signals, not to mention the many standards of road construction and 

All information and communication products and services demand 
extensive consensus. Participants at both ends of any conversation 
have to understand each other's language. Multiply one conversation 
by a billion, factor in a thousand different media choices, and then start 
to count three-way, four-way, n-way conversations, and the amount of 
consensus-setting skyrockets. 

In the network economy, ever-less energy is needed to complete 
a single transaction, but ever-more effort is needed to agree on what 
pattern the transaction should follow. 

70 / New Rules for the New Economy 

Thus "feeding the web first" increases in necessity. Businesses can 
expect to devote great intellectual capital on formulating, negotiating, 
deciding, forecasting, and adhering to emerging standards. The ques- 
tion "Which platform do we back?" will not be confined to PCs. It will 
be asked in regard to calendars, cars, accounting principles, and even 

As more of the economy migrates to intangibles, more of the econ- 
omy will require standards. 

But consumers will groan under the load of decisions. There is a 
ying-yang tradeoff in the new economy. The ying, or positive side, is that 
consumers keep most of the gains in productivity that are earned by 
technology. Competition is so severe, and transactions so "friction- 
free," that most of each cycle's betterment goes not to corporate profits 
but to consumers in the form of cheaper prices and higher quality. 

The yang, or downside, is that consumers have a never-ending on- 
slaught of decisions to make about what to buy, what standard to join, 
when to upgrade or switch, and whether backward compatibility is 
more important than superior performance. The fatigue of sorting out 
options and allegiances, or recovering from them, is underappreciated 
at the moment, but will mount. The joy of the new economy is that the 
next version is almost free; the bane is that no one wants the hassle of 
upgrading to it, even if you pay them to do it. 

The fatigue will only worsen. The net is a possibility factory, churn- 
ing out novel opportunities by the screenful. Unharnessed, this explo- 
sion can drown the unprepared. Standardizing choices helps tame the 
debilitating abundance of competing possibilities. This is why the most 
popular sites on the web today are meta-sites that sort the abundance 
and point you to the best. 

Since the network economy is so new, we as a society have paid 
little attention to how standards are created and how they grow. But we 
should notice, because once implemented, a successful standard tends 
to remain forever. And standards themselves shape behavior. 

I was associated with the genesis of the Well, one of the first public 
computer conferencing systems to be plugged into the internet. The 
Well was conceived and built by others, but as director of the poor non- 

Feed the Web First / 71 

profit that owned it, and as one of the first participants to join when it 
opened, I was involved in creating its policies. It became clear almost 
from day one that the technical specifications of the software that the 
Well used directly shaped the kind of community growing within it. 
Other models of conferencing software used elsewhere produced differ- 
ent kinds of communities. The Well's software — as implemented by the 
Well — encouraged linear conversations and community memory; it dis- 
couraged anonymity, but encouraged responsibility for words and top- 
ics; it permitted limited forms of dissent and retraction, and it allowed 
users to invent their own tools. It did all this primarily by means of Unix 
code — by the software standards set up within the Well — rather than by 
posted rules. The community it shaped was distinctive and long-lived. 
In fact the community, with all its quirks, is still going, even though the 
software that runs it has evolved into a web browser interface. The be- 
havior-changing standards remain. The power to mold a community by 
code rather than regulation was eventually articulated by Well users into 
a serviceable maxim: Peace through tools, not rules. 

The internet and the web also contain toolish standards that invis- 
ibly shape our behavior. We have ideas about ownership, about acces- 
sibility, about privacy, and about identity that are all shaped by the code 
of HTML and TCP/IP, among others. Currently only a small portion of 
our lives flow through these webs, but as cyberspace subsumes televi- 
sionspace and phonespace and much of retailspace, the influence of 
standards upon social behavior will grow. 

Eventually technical standards will become as important as laws. 

Laws are codified social standards; but in the future, codified techni- 
cal standards will be just as important as laws. Harvard Law professor 
Lawrence Lessig says, "Law is becoming irrelevant. The real locus of 
regulation is going to be (computer) code." As networks mature, and 
make the transition from ad hoc prestandard free-for-alls to fluid hot 
spots of innovation, and then into full-fledged systems with deeply em- 
bedded standards, standards increasingly ossify into something like 

Standards also harden with age. They become resistant to change 
and they descend into hardware. Their code gets wired into the backs 

72 / New Rules for the New Economy 

of chips, and as the chips spread, the standard infiltrates ever more 

An elaborate process of legal overview monitors and analyzes our 
lawmaking. So far we have little of the sort for our standard-making, 
although these agencies, such as the ITU (International Telecom Union) 
will soon be as influential as courts. Standards are not just about tech- 
nology. They are about soft and fuzzy things such as options and re- 
lationships and trust. They are social instruments. They create social 

A network is like a country in that it is a web of relationships regu- 
lated by standards. In a country citizens pay taxes and adhere to laws 
for the benefit of all. In a network, netizens feed the web first for the 
benefit of all. The network economy is a meta-country. Its web of rela- 
tionships differ from those of a country in three ways: 

■ No geographical or temporal boundaries exist — relations flow 
ceaselessly 24 by 7 by 365. 

■ Relations in the network economy are more tightly coupled, more 
intense, more persistent, more diverse, and more intimate in many 
ways than most of those in a country. 

■Multiple overlapping networks exist, with multiple overlapping 

These hyperconnections can either strengthen or weaken traditional 
relationships. The extremely personal, highly trust-bound relations in a 
family stand to be strengthened, while the diffuse and nearly contrac- 
tual relations in a nation-state are liable to weaken. Yet, as Peter Drucker 
points out, "The nation-stare is not going to wither away. It may remain 
the most powerful political organ around for a long time to come, but it 
will no longer be the indispensable one." In its stead we'll rely on non- 
governmental agencies such as the Red Cross, ACLU, HMOs, insurance 
giants, the net and the web, and UN-like entities. These parapolitical 
organizations will supplement the embedded nation-state. They will be 
the indispensable networks we care about. 

In both country and network, the surest route to raising one's own 
prosperity is raising the system's prosperity. The one clear effect of the 
industrial age is that the prosperity individuals achieve is more closely 

Feed the Web First / 73 

related to their nation's prosperity than to their own efforts. Lester Thu- 
row, an MIT economist, has pointed out that enabling the lowest paid 
to earn more is the best way to raise wages for the highest paid — the 
theory being that a rising tide lifts all boats. The network economy will 
only amplify this. 

To raise your product, lift the networks it ties into. To raise your com- 
pany, lift the standards it supports. To raise your country, increase the 
connections (in quality and quantity) that allow others to prosper. 

To prosper, feed the web first. 

The web is underfed right now. It is small compared to the rest of 
the world. In 1998 the internet boasted of an estimated 120 million peo- 
ple with access. But that means only 2% of human adults have a direct 
line to the online network. 

But the net is growing exponentially fast. If current rates continue, by 
early in the new century, 1 billion people will have internet access, 75% 
of adults will access to some kind of phone, and, according to Nicholas 
Negroponte, there will 10 billion electronic objects connected together 
online. Every year the net engulfs more of the world. 

The net is moving irreversibly to include everything of the world. 

As the net takes over, many observers have noted the gradual dis- 
placement in our economy of materials by information. Automobiles 
weigh less than they once did and yet perform better. Industrial materials 
have been replaced by nearly weightless high-tech know-how in the form 

Even industrial objects like 
automobiles follow new rules. 
An automobile's average 
weight is dropping and will 
continue to drop as information 
replaces its mass. 

74 / New Rules for the New Economy 

of plastics and composite fiber materials. Stationary objects are gain- 
ing information and losing mass, too. Because of improved materials, 
high-tech construction methods, and smarter office equipment, new 
buildings today weigh less than comparable ones from the 1950s. So it 
isn't only your radio that is shrinking, the entire economy is losing 
weight too. 

Even when mass is conserved, information increases. An average 
piece of steel manufactured in 1998 was vastly different from an av- 
erage piece of steel made in 1950. Both pieces weighed approximately 
the same, but the one made recently is far superior in performance be- 
cause of the amount of design, research, and knowledge that went into 
its creation. Its superior value is not due to extra atoms, but to extra 

The wholesale migration from mass to bits began with the arrival 
of computer chips. This subtle disembodiment was first viewed as a 
unique dynamic of the high-tech corridors of Silicon Valley. Software 
was so strange — part body, part spirit — that nobody was surprised 
when the computer industry itself behaved strangely. The principles of 
the net, such as increasing returns, were seen as special cases, anom- 
alies within the larger "real" economy of steel, oil, automobiles, and 
farms. What did such weirdness have to do with, say, making cars, or 
selling lettuce? At first, nothing. But by now every industry (shoe retail, 
glass manufacturing, hamburgers) has an information component, and 
that component is increasing. There is not a single company of conse- 
quence that does not use computers and communication technology. 
All U.S. companies (low as well as high-tech) together spent $212 bil- 
lion on information technology in 1996. Often, the digital component 
of the firm, say the IT or MIS department, or the wizards running the 
technology, will be the first to feel the influence of the new rules and net- 
work dynamics. Consultants Larry Downes and Chunka Mui say, "Even 
though the primary technology of many industries may not be in transi- 
tion . . . every industry is going through a revolution in its information 
technology." As more of a company "goes online" nerd ideas begin to 
seep into the whole organization, reshaping the firm's understanding 
of what it is doing. Over time, more and more employees will chase the 
opportunities that intensive information and communication networks 

Feed the Web First / 75 

New network technology and globalization accelerates the disem- 
bodiment of goods and services. The new dynamics of information will 
gradually supersede the old dynamics of industrialization until network 
behavior becomes the entire economy. 

Bit by bit, the logic of the network will overtake every atom we deal 

The logic of the network will spread from its base in silicon chips, 
to infiltrate steel, plywood, chemical dyes, and potato chips. All manu- 
facturing, whether seeded with silicon wafers or not, will respond to 
network principles. 

Consider oil — the quintessential atom-based resource. The classi- 
cal theory of diminishing returns was practically invented to explain the 
oil industry. Easy oil is extracted cheaply at first; then at a certain point 
the expense of extraction doesn't justify the cost unless the price goes 
up. But by now the oil industry is so invaded by chip technology that 
it is beginning to obey the laws of the new economy. Sophisticated 3D 
viewing software allows geologists to map oil-yielding layers to within 
a few meters; computer-guided flexible drills can burrow sideways with 
precision, reaching small pockets of oil. Superior pumps extract more 
oil with less energy and maintenance. Diminishing returns are halted. 
The oil flows steadily at steady prices, as the oil industry slides into the 
new economy. 

And what could be more industrial-age than automobiles? Yet, chips 
and networks can take the industrial age out of cars, too. Most of the 
energy a car consumes is used to move the car itself, not the passenger. 
So if the car's body and engine can be diminished in size, less power is 
needed to move the car, meaning the engine can be made yet smaller. 
A smaller engine requires a yet smaller engine, and so on down the 
slide of compounded value that microprocessors followed. The car's 
body can be reduced substantially using smart materials — stuff that re- 
quires increasing knowledge to invent and make — which in turn means 
a smaller, more efficient engine can power it. 

Detroit and Japan have designed cars that weigh only 500 kilograms. 
Built out of ultra-lightweight composite fiber material, these prototypes 
are powered by high-tech hybrid engine motors. They reduce the mass 

76 / New Rules for the New Economy 

of radiator, axle, and driveshaft by substituting networked chips. They in- 
sert chips to let the car self-diagnose its performance, in real time. They 
put chips in brakes, making them less likely to skid. They put micropro- 
cessors in the dashboard to ease navigation and optimize fuel use. They 
use hydrogen fuel cells that do not pollute, and electric motors with 
low noise pollution. And just as embedding chips in brakes made them 
better, these lightweight cars will be wired with network intelligence to 
make them safer: A crash will inflate intelligent multiple air bags — think 
"smart bubblepak." 

The accumulated effect of this substitution of knowledge for mate- 
rial in automobiles is what energy visionary Amory Lovins, director of 
the Rocky Mountain Institute, calls a hypercar: an automobile that will 
be safer than today's car, yet can cross the continental United States on 
one tank of hydrogen fuel. 

Already, the typical car boasts more computing power than your typ- 
ical desktop PC. Already the electronics in a car cost more ($728) than 
the steel in the car ($675). But what the hypercar promises, says Lovins, 
is a car remade by silicon. A hypercar can be viewed as step toward a 
vehicle that is (and behaves like) a solid state module. A car becomes 
not wheels with chips, but a chip with wheels. And this chip with wheels 
will drive on a road system increasingly wired as a decentralized elec- 
tronic network obeying the network economy's laws as well. 

Once we visualize cars as chips with wheels, it's easier to imagine air- 
planes as chips with wings, farms as chips with soil, houses as chips with 
inhabitants. Yes, they will have mass, but that mass will be subjugated 
by the overwhelming amount of knowledge and information flowing 
through it. In economic terms, these objects will behave as if they had 
no mass at all. In that way, they migrate to the network economy. 

Because information trumps mass, all commerce migrates to the 
network economy. 

MIT Media Lab director Nicholas Negroponte guesstimates that 
the online economy will have reached $1 trillion by 2000. Most tenured 
economists think that figure is terribly optimistic. But actually that op- 
timistic figure is terribly underestimated. It doesn't anticipate the scale 
on which the economic world will move on to the internet as the net- 

Feed the Web First / 77 

work economy infiltrates cars and traffic and steel and corn. Even if all 
cars aren't sold online immediately, the way cars are designed, man- 
ufactured, built, and operated will depend on network logic and chip 

The current concern about the size of the online market will have di- 
minishing relevance, because all commerce is jumping on to the inter- 
net. The distinctions between the network economy and the industrial 
economy will likewise blur and fade, as all economic activity is touched 
in some way by network rules. The key distinction remaining will be be- 
tween the animated versus the inert. 

The realm of the inert encompasses any object that is divorced from 
its economic information. A head of lettuce today for instance does not 
contain any financial information beyond a price sticker. Once applied, 
that price is fixed, too. It doesn't change unless a human changes it. 
The economic consequences of lettuce sales elsewhere, or a change in 
the general global economy do not affect the head of lettuce itself. In- 
stead, lettuce-related information flows through wholly separate chan- 
nels — news programs or business newsletters — that are divorced from 
the lettuce itself. The lettuce is economically inert. 

The realm of the animated is different. It's vastly interconnected. In 
this coming world a head of lettuce carries its own identity and price, 
displayed perhaps on an LED slab nearby, or on a disposable chip at- 
tached to its stem. The price changes as the lettuce ages, as lettuce 
down the street is discounted, as the weather in California changes, as 
the dollar surges in relation to the Mexican peso. Traders back in su- 
permarket headquarters manage the "yield" of lettuce prices using the 
same algorithms that airlines use to maximize their profits from airline 
seats. (An unsold seat on a 747 is as perishable as an unsold head of 
lettuce.) In relation to the net, the lettuce is animated. It is dynamic, 
adaptive, and interacting with events. A river of money and information 
flows through it. And if money and information flow through some- 
thing, then it's part of the network economy. 

The progression by which the old economy migrates toward the new 
follows a relentless logic: 

■ Increasing numbers of inert objects are animated by information 

78 / New Rules for the New Economy 

■Once the inert is touched by a network, it obeys the rules of 

■ Networks don't retreat; they tend to multiply into new territories. 

■ Eventually all objects and transactions will run by network logic. 

One is tempted to add "resistance is futile." The overwhelming 
long-term trend toward universal connection may seem Borg-like, as if 
all things will lose their identity and become part of one large mindless 
swarm. Two things should be made clear: 1) constant, ubiquitous con- 
nections do not per se eliminate individuality; and 2) by "all" I mean an 
ongoing trend that approaches an asymptote, not a finality. 

One might say that industrialization eradicated hand-crafted pro- 
duction to the point where all objects are machine-made. That is true 
by and large, and it accurately describes the destination of a trend. But 
the trend has a few notable exceptions. In an era of objects made com- 
pletely by machines, hand-made items are a scarcity and thus com- 
mand very high prices. A few — but only a few — shrewd artisans and 
entrepreneurs can make a living crafting items by hand, items such as 
bicycles, furniture, guitars, that would ordinarily be stamped out in a 
factory. Resistance is marginal, but profitable. 

The same will be true in the networking of the economy. Resistance 
will not be futile. In a world of ubiquitous connection, where everything 
is connected to everything else, scarce will be the person not connected 
at all, or the company not pushing ideas and intangibles. If these mav- 
ericks are able to interface with the networked economy without los- 
ing their distinctivness or value, then they will be sought out, and their 
products priced high. One can imagine a successful idea-artist in the 
year 2005 who does no email, no phone, no videoconferences, no VR, 
no books, and who does not travel. The only way to get her fabulous 
ideas is in person, face-to-face at her hideout, live. The fact that she is 
booked 8 months in advance only adds to her reputation. 

MIT economist Paul Krugman has an alternative vision of how infor- 
mation technology will invert the expected order. He writes: "The time 
may come when most tax lawyers are replaced by expert systems soft- 
ware, but human beings are still needed — and well paid — for such truly 
difficult occupations as gardening, house cleaning, and the thousands 

Feed the Web First / 79 

of other services that will receive an ever-growing share of our expen- 
diture as mere consumer goods become steadily cheaper." Actually we 
don't need to wait for the future. Recently I had to hire two different 
freelancers. One sat in her office moving symbols around. She tran- 
scribes tape-recorded interviews and charges $25 per hour. The other is 
a guy who works out of his home repairing greasy kitchen appliances. 
He charges $50 per hour, and as far as I could tell had more business of 
the two. Krugman's argument is that these "manual crafts" (as they are 
bound to be labeled when so high-priced) will level the salary discrep- 
ancies that now exist between high tech and low tech occupations. 

My argument is that great gardeners will be high-priced not only be- 
cause they are scarce and exceptions, but also because they, like every- 
one else, will be using technology to eliminate as much of the tedious 
repetitive work as possible, leaving them time to do what humans are 
so good at: working with the irregular and unexpected. 

At the dawn of the industrial age it would have been difficult to imag- 
ine how such quintessential agrarian jobs as farming, husbandry, and 
forestry could become so industrialized. But that is what happened. Not 
just agrarian work, but just about every imaginable occupation of that 
period — especially menial labor — was intensely affected by industrial- 
ization. The trend was steady: The entire economy eventually became 
subjected to the machine. 

The full-scale trend toward the network economy is equally hard to 
imagine, but its progression is steady. It follows a predictable pattern. 
The first jobs to be absorbed by the network economy are new jobs that 
could only exist in the new world: code hackers, cool hunters, webmas- 
ters, and Wall Street quants. Next to succumb are occupations with old 
goals that can be accomplished faster or better with new tools: real es- 
tate brokers, scientists, insurance actuaries, wholesalers, and anyone 
else who sits at a desk. Finally, the network economy engulfs all the 
unlikely rest — the butchers, bakers, and candlestick makers — until the 
entire economy is suffused by networked knowledge. 

The three great currents of the network economy: vast globaliza- 
tion, steady dematerialization into knowledge, and deep, ubiquitous 
networking — these three tides are washing over all shores. Their en- 
croachment is steady, and self-reinforcing. Their combined effect can 

80 / New Rules for the New Economy 
be rendered simply: The net wins. 


Maximize the value of the network. Feed the web first. Networks are 
nurtured by making it as easy as possible to participate. The more diverse 
the players in your network — competitors, customers, associations, and 
critics — the better. Becoming a member should be a breeze. You want 
to know who your customers are, but you don't want to make it hard for 
them to get to you (IDs, yes; passwords, no). You want to make it easy 
for your competitors to join too (all their customers could potentially be 
yours as well). Be open to the power of network effects: Relationships 
are more powerful than technical quality. Especially beware of the "not- 
invented-here" syndrome. The surest sign of a great network player is 
its willingness to let go of its own standard (especially if it is "superior") 
and adopt someone's else's to leverage the network's effect. 

Seek the highest common denominator. Because of the laws of 
plentitude and increasing returns, the most valuable innovations 
are not the ones with the highest performance, but the ones with 
the highest performance on the widest basis — the "highest per wid- 
est." Feeding the web first means ignoring state-of-the-art advances, 
and choosing instead the highest common denominator — the high- 
est quality that is widely accepted. One practical reason to pick the 
highest-per-widest techniques and technologies is because complex 
technologies require passionate and informed users who can share 
experience and context, and you want the maximum dispersion of us- 
age that doesn't sacrifice quality. 

Don't invest in Esperanto. No matter how superior another way 
of doing something is, it can't displace an embedded standard — like 
English. Avoid any scheme that requires the purchase of brand new 
protocols when usable ones are widely adopted. 

Apply an embedded standard in a new territory. Is there a way to 
accomplish what you want using existing standards and existing webs 
in a different context? Inventing a novel standard for an existing net- 
work is quixotic. But some of the greatest success stories in current 

Feed the Web First / 81 

times are about firms that master one network and then use its embed- 
ded standards to exploit an established network in need of improve- 
ment. This process is called "interfection." The present revolution in 
telephony is all about zealous internet firms that are interfecting the 
old Bell-head world of moving voices with newly established proto- 
cols for moving data on the internet (known as internet protocols, or 
IP). The huge increasing returns that spin off the internet give them a 
great advantage. Indeed, one telephony standard after another is fall- 
ing before the relentless march of IP. Likewise, aggressive companies 
are leveraging the established desktop standard of Windows NT — with 
all its plentitude effects — to interfect new domains such as telephone 
switching gear. Even the huge cable TV networks have something to of- 
fer. The emerging standards for video transmission, such as MPEG, are 
trying to migrate onto the internet. In choosing which standard to back, 
consider dominant standards outside your current network that could 
interfect your own turf. 

Animate it. As the network economy unfolds, more firms will begin 
to ask themselves this question: How do we put what we do into the 
logic of networks? How do we prepare a product to behave with network 
effects? How do we "netize" our product or service? (The answer is not 
"put it on a web site.") Architects, for instance, generate huge volumes 
of data. How can they be standardized? How can the data about a phys- 
ical object (say a door) flow through or with that object? What are the 
fewest functions we can add to glass windows to incorporate them into 
networks? What steps can a contractor take to allow the networked flow 
of information from any architect to any contractor to any builder to 
any client? How do we increase the number of networks our service 

Side with the net. Imagine that in i960 an elf let you in on a secret: 
For the next 50 years computers would shrink drastically and cheapen 
yearly on a predictable basis. Subsequently, whenever you needed to 
make a technological decision, if you had counted on the smaller and 
cheaper, you would have always been right. Indeed you could have per- 
formed financial miracles knowing little more than this rule. Here is 
today's secret: In the coming 50 years, the net will expand and thicken 
yearly on a predictable basis — its value growing exponentially as it em- 

82 / New Rules for the New Economy 

braces more members, and its costs of transactions drop toward zero. 
Whenever you need to make a technological decision, if you err on the 
side of choosing the more connected, the more open system, the more 
widely linked standard, you will always be right. 

Employ Evangelists. Economic webs are not alliances. There are of- 
ten few financial ties among members of a web. An effective way of 
establishing standards and coordinating development is through evan- 
gelists. These are not salespeople, nor executives. Their job is simply 
to extend the web, to identify others with common interests and then 
assist in bringing them together. In the early days when Apple was a co- 
creator of the emerging PC web, it successfully employed evangelists to 
find third-party vendors to make plug-in boards, or to develop software 
for their machines. Go and do likewise. 


After Success, Devolution 

The tightly linked nature of the emerging economy makes it behave like 
a biological community. Wars and battles were the allegories of the in- 
dustrial economy. Coevolution and infections are more apt in the new 

Companies are like organisms evolving in an ecosystem. Some eco- 
systems in nature offer few opportunities for life. In the Arctic there 
are only a couple of strategies for survival, and a species had better 
get good at one of them. Other biomes are chock-full of opportunities, 
which are in constant flux, appearing and disappearing as species jockey 
for their niches. The harmony we attribute to nature is not static perfec- 
tion but a complex dance of ups, downs, trips and falls, and balance 

Rich, interactive, and highly flexible in shape, the network economy 
resembles a biome seething with action, a jungle in fast-forward mo- 
tion. New niches open up constantly and vanish quickly. Competitors 
sprout beneath you and then gobble your spot up. One day you are king 
of the mountain, and the next day there is no mountain at all. 

Biologists describe the struggle of an organism to adapt in this type 
of habitat as a long climb uphill, where uphill means greater adapta- 
tion. In this metaphor, an organism that is maximally adapted to the 
times is situated on a peak. Imagine a commercial organization instead 
of an organism. A company expends great effort to move its butt uphill, 
or to evolve its product so that it is sitting on top, maximally adapted to 
the consumer environment. 

All organizations (profit and nonprofit alike) face two problems as 

84 / New Rules for the New Economy 

they attempt to find their peak of optimal fit. Both problems are exacer- 
bated by the constant turbulence of the network economy. 

First, unlike the industrial era's relatively simple environment, in 
which it was fairly clear what an optimal product looked like and where 
on the stable horizon a company should place itself, it is increasingly 
difficult in the network economy to discern what hills are highest and 
which summits are false. 

In biological terms, the new economic landscape is "rugged," dis- 
rupted by gulfs, precipices, and steep slopes. Trails are riddled with 
dead ends, lead to false summits, and made impassable by big-time 
discontinuities. Because the economic terrain is jumbled with no over- 
all pattern, there is no certainty that a company intending to head up 
a slope toward a peak new market is actually climbing anything larger 
than a hill. In biospeak, they may succeed in getting to the top yet find 
themselves stuck on a suboptimal peak. 

Big and small companies alike have to deal with their new land- 
Turbulent times mean that local 
success is not global success. 
A company may be at peak 
efficiency, but on the wrong 
mountain. The trick is to select 
a high-potential area to excel 

scape. It's often unclear whether a firm should strive to be on top of a 
mountain (for example, to be the world's most reliable hard disk manu- 
facturer), when the whole mountain range beneath that particular peak 
may sink in a few years (if everyone moves their storage onto large pro- 
tein arrays). An organization can cheer itself silly on its way to becom- 
ing the world's expert on a dead-end technology. (The nuclear power 
industry offers one example.) 

Some of the most perfect technology was created just before its de- 
mise. Vacuum tube technology reached a nadir of complexity just be- 
fore it vanished. As MIT economist James Utterback writes: "Firms are 

Let Go at the Top / 85 

remarkably creative in defending their entrenched technologies, which 
often reach unimaginable heights of elegance in design and technical 
performance only when their demise is clearly predictable." It's rela- 
tively easy to arrive at a peak of perfection. The problem is that perfec- 
tion can be local, or suboptimal, like being the best basketball player in 
your state, but unaware of national tournaments. While a firm is con- 
gratulating itself on creating the world's fastest punch card reader — the 
fastest in the universe! — the rest of the economic world has moved on 
to the PC. 

The harsh news is that "getting stuck on a local peak" is a certainty 
in the new economy. 

Instability and disequilibrium are the norms; optimazation won't 
last long. Sooner, rather than later, a product will be eclipsed at its 
prime. Indeed, an innovation at its prime increases its chances of being 
eclipsed. In Mastering the Dynamics of Innovation, a study of innova- 
tion in the automobile industry, Utterback concludes that "an unhappy 
byproduct of success in one generation of technology is a narrowing of 
focus and vulnerability to competitors championing the next techno- 
logical generation." The product may be perfect, but for an increasingly 
smaller range of uses or customers. 

While one product is perfecting its peak, an outsider can move the 
entire mountain by changing the rules. Detroit was the peak of perfec- 
tion for big cars, but suddenly the small-car mountain overshadowed it. 
Sears was king of the retail mountain, but then Wal-Mart and Kmart's 
innovations created a whole new mountain range that towered above 
it. For a brief moment Nintendo owned the summits of the video-game 
mountain until Sega and later Sony built separate mountains even 
higher. Each of the displaced industries, companies, or products were 
stuck on a less optimal local peak. 

There is only one way out. The stuck organism must devolve. In or- 
der to go from a peak of local success to another higher peak, it must 
first go downhill. To do that it must reverse itself and for a while become 
less adapted, less fit, less optimal. It must do business less efficiently, 
with less perfection, relative to its current niche. 

This is a problem. Organizations, like living beings, are hardwired 

86 / New Rules for the New Economy 

to optimize what they know — to cultivate success, not to throw it away. 
Companies find devolving unthinkable and impossible. There is simply 
no allowance in the enterprise for letting go. 

And the better the company, the less room there is for devolution. 

Everything about a modern organization is dedicated to pushing up- 
hill. The CEO is trained, and paid well, to push the firm toward the peak. 
Quality circles get the entire workforce marching uphill toward optimal 
performance. Consultants monitor the tiniest detail, trying to eliminate 
anything that might keep the company from attaining the peak of per- 
fection. Reengineering wonks zero in on computer data showing which 
parts of the organization are lagging behind. Even the receptionist is in 
search of excellence. 

Where in the modern company is the permission, let alone the skill, 
to let go of something that is working, and trudge downhill toward 

And have no doubt: It will be chaotic and dangerous down below. 
The definition of lower adaptivity is that it places you closer to extinc- 
tion. But you have to descend and risk extinction in order to have the 
opportunity to rise again. 

Economist Joseph Schumpeter calls the progressive act of destroying 
success "creative destruction." It's an apt term. Letting go of perfection 
requires a brute act of will. And it can be done badly. Management guru 
Tom Peters claims that corporate leaders are now being asked to do 
two tasks — building up and then nimbly tearing down — and that these 
two tasks require such diametrically opposed temperaments that the 
same person cannot do both. He impishly suggests that a company in 
the fast-moving terrain of the network economy ordain a Chief Destruc- 
tion Officer. 

With or without someone in charge of creative destruction, there is 
no alternative (that we know of) to leaving behind perfectly good prod- 
ucts, expensively developed technology, and wonderful brands, and 
heading down to trouble in order to ascend again with hope. 

Once upon a time this march was rare. The relatively stable markets 
and technological environment of the industrial era were smooth, not 
rugged. Only a few parameters changed each year, and they changed 

Let Co at the Top / 87 

gradually. Opportunities arrived with forewarning. Those days are over. 
The biological nature of the new economic order means that the sud- 
den disintegration of established domains will be as certain as the sud- 
den appearance of the new. 

There can be no expertise in innovation unless there is also exper- 
tise in demolishing the ensconced. 

There is nothing wrong with perfection. To be maximally fit for a 
niche, to serve optimally, to seek the peak of perfection — these will al- 
ways remain the goals of any firm, or individual. So why let go of perfec- 
tion at the top? 

The problem with the top is not too much perfection, but too little 
perspective. Great success in one product or service tends to block a 
longer, larger view of the opportunities available in the economy as a 
whole, and of the rapidly shifting terrain ahead. Legendary, long-lived 
companies are intensely outward-looking. They can spot a global peak 
and distinguish it from the many false peaks. They understand that an 
inward focus, especially a narrow focus on being "world's best" in some 
matter, can work against long-term adaptation by blinding the organiza- 
tion from seeking new heights. Better for the long haul is an outward 
perspective that is always seeking alternative mountains to climb. 

This outward vista is all the more critical in the new economy be- 
cause perfection is no longer a solo act. Success is a highly interdepen- 
dent enterprise, encompassing a network of vendors, customers, and 
even competitors. A firm needs to explore widely, outside of the current 
favored position, and at times contrarily. 

Letting go at the top is not an act against perfection, but against 

In addition to the scarcity of leaders willing to disassemble the prof- 
itable, and the natural bias of companies toward perfection, there is 
another reason why letting go is so hard. Economists Paul Milgrom and 
John Roberts studied the competencies — the winning traits — of a large 
number of firms in modern manufacturing and concluded that compe- 
tencies of companies tended to occur in suites, or in a guilds of skills. 

88 / New Rules for the New Economy 

This natural bundling of traits makes it very difficult for contend- 
ers to challenge a successful firm. As Richard Nelson, an economist at 
Columbia University says, "Successful firms often are difficult to imitate 
effectively because to do so requires that a competitor adopt a number 
of different practices at once." Companies can buy technology and hu- 
man skills in a particular area. But gradually acquiring one or two com- 
petencies at a time does no good when you are attempting to displace a 
highly successful firm. The whole suite of mastery has to be acquired si- 
multaneously in order for you to be competitively effective. A firm such 
as Disney is almost inimitable because of the difficulty of obtaining in 
one swift swoop its highly integrated mix of skills. 

The natural bundling of traits also makes unraveling for devolution 
immensely difficult. To devolve demands going against all the best qual- 
ities of an organization all at once. The organic world offers a number 
of lessons in this regard. Biotechnology is built on the knowledge that 
most genes don't code for anything themselves. Most genes regulate — 
turn off and on — other genes. The genetic apparatus of a cell, then, is 
a dense network of hyperlinked interactions. Any gene is indirectly con- 
trolled by many other genes. 

Thus, most attributes in a biological organism usually travel in the 
genome as loosely coupled associations. Blue eyes and freckles, say. Or 
red hair and a hot temper. Two important consequences follow from 
this. First, to get rid of the redhead's feisty temperament by evolution 
may also mean — at least at first — getting rid of the red hair. Animal 
breeders know this dilemma firsthand. It is difficult to breed out an un- 
wanted trait without breeding out many desirable ones. Chicken breeders 
can't get rid of a chicken's aggressiveness without throwing out its egg- 
laying proficiencies. 

Companies work the same way. The interlocking guild of competen- 
cies, which gives them their advantages, becomes a drawback during 
change. The increased interlinkage of the network economy heightens 
this dilemma. In the network economy, the skills of individual employ- 
ees are more tightly connected, the activities of different departments 
more highly coordinated, the goals of various firms more independent. 
The net brings the influence of formerly unrelated forces to bear upon 
each potential move. 

The more successfully integrated a firm's capabilities are, the harder 

Let Go at the Top / 89 

it is to shift its expertise by changing just a little. Thus successful firms 
are more prone to failure during high rates of change. (Success makes 
it easy for the successful to deny this fact.) Indeed, the very success of 
successful organizations makes them conservative toward change — be- 
cause they must unravel many interdependent skills — even if some are 
working fine. 

The problem that IBM faced with the arrival of the personal com- 
puter in the early 1980s was not the problem of acquiring technological 
know-how. As a matter of fact, IBM already knew how to build personal 
computers better than anyone. But the package of proficiencies the 
blue suits had honed over the years to make IBM indomitable in the 
mainframe computer field could not be gradually adapted to fit the new 
faster-paced terrain of desktop-based computing. IBM was supreme in 
the old regime because their sales, marketing, R&D, and management 
skills were all optimally woven into a highly evolved machine. They 
couldn't change the size of the computers they sold without also al- 
tering their management, forecasting, and research skills at the same 
time. Changing everything at once is difficult for anyone, anytime. 

Because skill guilds constrain (and defend) an organization, it is of- 
ten far easier to start a new organization than to change a successful 
old one. 

This is a major reason why the network economy is rich in start-ups. 
Starting new is a less risky way to assemble an appropriate new set 
of competencies than trying to rearrange an established firm, whose 
highly intertwined bundles resist unraveling. 

In a rugged economic landscape, about the only hope an established 
company has for adapting to turbulent change is by employing the 
"skunk works" mode, which reflects another biological imperative. Com- 
puter simulations of evolution, particularly those run by David Ackely, a 
researcher at Bellcore, demonstrate how the source for mutations that 
eventually conquer a population start at the geographical fringes of the 
population pool. Then after a period of "beta testing" on the margins, 
the mutants overtake the center with their improvements and become 
the majority. 

At the edges, innovations don't have to push against the inertia of 

90 / New Rules for the New Economy 

an established order; they are mostly competing against other mutants. 
The edges also permit more time for a novel organism to work out its 
bugs without having to oppose highly evolved organisms. Once the 
mutants are refined, however, they sweep rapidly through the old order 
and soon become the dominant form. 

This is the logic of skunk works. Hide a team far from the corporate 
center, where the clever can operate in isolation, away from the suffo- 
cating inertia of success. Protect the team from performance pressures 
until their work has had the kinks ironed out. Then introduce the inno- 
vation into the center. Every once in a while it will take over and become 
the new standard. 

Economist Michael Porter surveyed 100 industries in 10 countries 
and found that in all the industries he studied, the source of innova- 
tions were usually either "outsiders" or else relative outsiders — estab- 
lished leaders in one industry making an entry into a new one. 

To maximize innovation, maximize the fringes. 

Encourage borders, outskirts, and temporary isolation where the 
voltage of difference can spark the new. The principle of skunk works 
plays a vital role in the network economy. By definition a network is 
one huge edge. It has no fixed center. As the network grows it holds in- 
creasing opportunities for protected backwaters where innovations can 
hatch, out of view but plugged in. Once fine-tuned, the innovation can 
replicate wildly. The global dimensions of the network economy means 
that an advance can be spread quickly and completely through the 
globe. The World Wide Web itself was created this way. The first soft- 
ware for the web was written in the relative obscurity of an academic 
research station in Geneva, Switzerland. Once it was up and running 
in their own labs in 1991, it spread within six months to computers all 
around the world. 

The basic rules of success are eternal: serve customers obsessively, 
escalate quality, outdo your competitors, have fun. The nature of the 
new economy changes none of those rules. But the success they help 
one attain is not what it used to be. However you want to measure it, 
success is a type of inertia. The law of increasing returns can compound 
it but success still follows its momentum to the top — but the top is 

Let Go at the Top / 91 

highly unstable now. Being at the top when the sands shift is a liability. 
For anyone sane, success should breed paranoia. 

In the highly turbulent, quickly reforming environment of the new 
economy, the competitive advantage goes to the nimble and malleable, 
the flexible and quick. Speed and agility trump size and experience. Fast 
to find the new is only one half the equation; fast to let go is the other 
important half. 

Of all the lessons that biology has to offer us as we begin to as- 
semble a network economy, the necessity of abandoning our successes 
will be the hardest to practice. 


Don't mistake a clear view for a short distance. The terror of devolu- 
tion is that a firm must remain intact while it descends into the harsh 
deserts between the mountains of successes. It must continue to be 
more or less profitable while it devolves. You can't jump from peak to 
peak. No matter how smart or how speedy an organization is, it can't 
get to where it wants to go unless it muddles across an undesirable 
place one step at a time. Enduring a period of less than optimal fitness 
is doubly difficult when a very clear image of the new perfection is in 
plain sight. 

For instance, sometime in the early 1990s the Encyclopaedia Britan- 
nica company saw that they were stuck on a local peak. They were at the 
top: the best encyclopedia in print. They had a worldwide sales force 
peddling a world-recognized brand. But rising fast nearby was some- 
thing new: CD-ROM. The outline of this dazzling new mountain was 
clear. Its height was inspiring. But it was a different realm from their old 
mountain: no paper, no door-to-door salespeople, cheap, little dinky 
disks on the shelf, and a media that required constant updates. They 
would have to undo much of what they knew. Still there, clear as could 
be, was their future. But while the destination was extremely clear, the 
path that led to it was treacherous. And, it turned out, the route was 
even longer than they thought. The company spent millions, lost sales- 
people in droves, and verged on collapse. They entered a scary period 
during which neither print nor CD worked. Eventually they completed 

92 / New Rules for the New Economy 

To scale a higher peak — a 

potentially greater gain — often 
means crossing a valley of less 
fitness first. A clear view of the 
future should not be mistaken 
for a short distance. 

the CD-ROM encyclopedia they had envisioned many years earlier, but 
only after an outsider (Microsoft) published a better one. Encyclopae- 
dia Britannica's future is still in doubt. But their travails are common. 
Says futurist Paul Saffo: "We tend to mistake a clear view of the future 
for a short distance." 

Today, nearly everyone in business has a clear view of the future of 
TV. It's something that comes to you in the same way you get the inter- 
net. You choose your shows, from 500 channels. You can shop, maybe 
interact with a game, or click for more information about a movie you 
are watching. The technology seems feasible, the physics logical, and 
the economics plausible. But Future TV looks a lot closer than it really 
is because the path between here and there winds through a barren 
desert with little optimal about it. Although the economics may work 
later, they barely work out now in the alkali flats. It may be that none of 
the large television or computer or phone companies are sufficiently 
nimble (or hungry) to make it across the valley of death — even though 
the shape of success is so visible. 

Send the network out. There is only one sound strategy for cross- 
ing the valley: Don't go alone. Established firms are now doing what 
they should be doing: weaving dozens, if not hundreds, of alliances and 
partnerships; seeking out as many networks of affiliation and common 
cause as possible, sharing the risk by making a web. A motley caravan 
of firms can cross a suboptimal stretch with hope. Banding together 
buys their networks several things. First, it allows knowledge about the 
terrain to be shared. Some firm riding point might discover a small hill 
of opportunity. Settling there allows small oases of opportunity to be 

Let Go at the Top / 93 

created. If enough intermediate oases can be found or made, the long 
journey can become a series of shorter hops along an archipelago of 
small successes. The more firms, customers, explorers, and vested in- 
terests that are attempting to cross, the more likely the archipelago can 
be found or created. 

To create the future car — a car that is easily imaginable right now — 
an entrepreneurial car company can only succeed by spinning together 
a network of vendors, regulators, insurers, road makers, and competi- 
tors to help others to devolve quickly and cross. 

Who is in charge of devolution? It is a rare leader who can creatively 
destroy as well as relentlessly build. It's a rare committee that will vote 
to terminate what works. It's a rare outsider whose advice to relinquish 
a golden oldie will be heeded. You are in charge of devolving. Everyone 
is. It's just one more chore in the network economy. 

Question success. Not every success needs to be abandoned drasti- 
cally, but every success needs to be questioned drastically. Do interest- 
ing substitutes exist? Are radical alternatives receiving compounding 
attention? You need to consider innovations far afield, ones that are not 
"on the same mountain." Are there innovations that are changing the 
rules of the game? Beware of minor incremental improvements — slight 
baby steps on the same mountain. These can be a form of denial. Nich- 
olas Negroponte, director of the MIT Media Lab, declares "Incremen- 
talism is innovation's worst enemy." 

Searching as a way of life. In the network economy, nine times out 
often, your fiercest competitor will not come from your own field. In tur- 
bulent times, when little is locked in, it is imperative to search as wide 
as possible for places where innovations erupt. Innovations increasingly 
interfect from other domains. A ceaseless blanket search — wide, easy, 
and shallow — is the only way you can be sure you will not be surprised. 
Don't read trade magazines in your field; scan the magazines of other 
trades. Talk to anthropologists, poets, historians, artists, philosophers. 
Hire some 17-year-olds to work in your office. Make a habit to visit a 
web site at random. Tune in to talk radio. Take a class in scenario mak- 
ing. You'll have a much better chance at recognizing the emergence of 
something important if you treat these remote venues as neighbors. 


Making a Different Kind of Big 

"Geography is dead!" 

This pronouncement has become a cliche among the advocates of 
digitalization and telecommunications. The advent of universal and in- 
expensive communication is said to usher in an era where distance, 
place, real estate, and geography are irrelevant. The notion is only half 

Place still matters, and will for a long time to come. However, the 
new economy operates in a "space" rather than a place, and over time 
more and more economic transactions will migrate to this new space. 

Geography and real estate, however, will remain, well . . . real. Cities 
will flourish, and the value of a distinctive place, such as a wilderness 
area, or a charming hill village, will only increase. 

Tom Peters, the perennially entertaining management guru, likes to 
scare the daylights out of dazed American CEOs by proclaiming, "Think 
of Asia, Latin America, Eastern Europe! They're smart, fast, and cheap. 
And they're next door. Your worst nightmare of a competitor is now 
only one-eighth of a second away!" That's the maximum time it takes 
a signal to travel from one end of the globe to the other. These hungry 
competitors can do anything you can do, cheaper, and they all are, at 
most, only an eighth of a second away. In short, Peters proclaims the 
death of distance and the arrival of globalization. 

That's the bad news. The good news is that those geographically far 
away competitors will never be any closer than an eighth of a second. 
And for many things in life, that is too far away. 

A kiss for instance. Or playing sports. Or getting to know flowers. 

From Places to Spaces / 95 

Start-up companies selling futuristic multiplayer online games have dis- 
covered that the inherent delay in the speed of light circling the globe 
causes real-time experiences to fail. That noticeable gap makes no real 
difference in the transmission of a book order, or a weather signal, but 
enough of life thrives on subtle instantaneous responses that one- 
eighth of a second kills intimacy and spontaneity. Thus actual real-time 
face-to-face meetings will retain their irreplaceable value. Thus airline 
travel will increase as fast as online communication increases. Thus cit- 
ies will endure as lag-free places where there are no one-eighth second 

People will inhabit places, but increasingly the economy inhabits a 

A place is bounded by four dimensions. For two things to be adja- 
cent, they must be close to each other on one of four axes: up/down, 
left/right, back/forth (x, y, z), and time. As rich as physical places are 
(and we still don't appreciate how rich they can be), they limit the num- 
ber of connections that entities can make within them. A person in a 
place can only interact with a fixed and rather small number of other 
people in the same vicinity. Artifacts can touch only the other artifacts 
in close proximity. 

A space, unlike a place, is an electronically created environment. It 
is where more and more of the economy happens. Unlike place, space 
has unlimited dimensions. Entities (people, objects, agents, bits, nodes, 
etc.) can be adjacent in a thousand different ways and a thousand differ- 
ent directions. A person in an electronic space can communicate to 10 

The invention of 
communication allowed life to 
evolve from globular organisms 
into fantastic beings, just as 
networks allow place-based 
firms to blossom into fantastic 

96 / New Rules for the New Economy 

million people at once, or interact in a game with 20,000 others — things 
that would be impossible in physical space. An automobile can be linked 
in hundreds of directions — to other cars stuck in traffic miles away, en- 
vironmental monitors, satellite navigation antennas, toll collectors, and 
the manufacturer's engine-performance center. In physical place a car can 
only interact with those within braking distance of its front and rear bum- 

Spaces aren't bound by proximity. The advantage of spaces is rooted 
less in their nongeographical virtuality and more in their unlimited ability 
to absorb connections and relationships. By means of communications, 
network spaces can connect all kinds of nodes, dimensions, relation- 
ships, and interactions — not just those physically close to one another. 

The popular suffix of "space" is a truncated version of cyberspace, 
a science fiction term for an immersive electronic space. But the roots 
of the term are deeper. The technical concept of "space" came out of 
mathematics and computer science. Space is one way scientists de- 
scribe complex systems; very complex spaces have their own unique 
dynamics. The notation of space is particularly handy when describing 
the ordinarily vague and indefinite form of networks. The net, as it en- 
compasses billions of objects and agents (there are already more than 
100,000 cameras on the net), operates in what mathematicians call 
"very high dimensions," and has correspondingly novel dynamics. As 
electronic mediated environments expand, place has less influence and 
complex space more. As the economy infiltrates each network medium, 
it trades a physical marketplace for a conceptual marketspace. 

The network economy shifts places to spaces. 

In the new realm of high dimensional spaces, the network economy 
exhibits the following space-based behaviors. 

■ A different kind of bigness 

■ Rampant clustering 

■ Peer authority 

■ Re-intermediation 

The industrial economy made it impossible to live next door to the 

From Places to Spaces / 97 

source of all the goods consumers desired. If you wanted bananas, 
many intermediaries had to handle the fruit between the plantation 
in Honduras and your kitchen. Between the author of a book and you 
there needed to be a chain of editors, bankers, printers, distributors, 
wholesalers, and booksellers. Between you and good health care were 
doctors, nurses, insurance behemoths, and hospital staff. Between you 
and the car of your dreams stood a line of miners, smelters, engineers, 
manufacturers, railroad yards, showrooms, and salesmen. Each one 
of these agents moved the good or service along; some by completing 
the product (the car engineer) or customizing the service (the hospital 
staff), and some simply by physically moving it toward you (the banana 
boat). In business theory this line came to be known as the value chain. 
Each intermediate link in the long chain of creation added some mea- 
sure of extra value, justifying the cost the link added to the good's final 
price. Companies competed to insert themselves into a value chain, 
then to expand their control of greater lengths of the chain. 

One of the very first noticeable effects of computers and networked 
communications was the alarming way they disrupted traditional value 
chains. Futurist Paul Saffo calls the multiple interactions needed to sur- 
vive in the new economy a move "from value chain to value web." 

In the markets pace of networks, value flows in webs. 

Many classic value chains were crowded with intermediaries who 
distributed a completed product or service. Take the banana wholesal- 
ers. Although they physically handled the product and often stored it in 
inventory at great cost, their primary value to the customer was infor- 
mational. In theory, small bunches of bananas could be wrapped and 
sent directly to your home from a particular plantation with fewer in- 
termediaries involved in warehousing and storage, and thus at lower 
costs. You would place an order directly to Best Bananas in Honduras 
for one bunch per week, except during the school holidays, and they 
then would mail them out to you. To do that effectively, though, would 
require network technology capable of a) finding a plantation you like; 
b) getting the right bunch to you at the right time; c) shifting to a coop- 
erating planter if the first planter's fruit was not yet ripe; d) tracking the 
account payable for such a tiny buyer as yourself; and, e) dealing with 

98 / New Rules for the New Economy 

all the millions of ordinary exceptions and screw-ups that any system as 
complex as this would entail. 

The industrial age had no technology capable of doing that, so it 
substituted the wholesale system for networked information. Orders 
were aggregated at the local produce stand, sent to a wholesaler, who 
aggregated them further, and relayed the combined request through 
various shipping intermediaries to a farmers' coop, which distributed 
orders to various planters. Your personal "order" was submerged in a 
sea of others; the system essentially ignored it. Making their way back 
to you, the bananas followed a reverse chain of links, sitting in ware- 
houses as a way to buffer the incomplete consumer information they 
should have had. 

It may be a long while before bananas skip the industrial value chain, 
but other foods, higher priced and not as bulky, already can be bought 
this way. Food fanatics in cities anywhere can purchase specialty cof- 
fees, or authentic maple syrup, or organic beef by linking up with farm- 
ers directly and getting their goods right from the farm via the post 
office, or FedEx networks, bypassing the wholesale and retail interme- 
diaries. When gourmets use web sites and direct-mail catalogs to buy 
directly from growers, the traditional intermediaries are taken out of the 

The banking industry was the first to name this creeping displace- 
ment of intermediaries. They noticed, quite rightly, that as information 
technology infiltrated the banking industry, and as the industry was de- 
regulated, nobody seemed to need banks anymore — at least not banks 
as bureaucratic intermediaries. You could get easier loans at Sears, 
higher interest from a mutual fund, and better service at an ATM. Bank- 
ing functions were being "d/sintermediated" the bankers cried! For the 
typical neighborhood bank this was especially true. The disintermedia- 
tion of the financial systems continues unabated; every week another 
bank branch shuts down. 

As more commercial activities shift toward knowledge and informa- 
tion, the economy seems ripe for fatal disintermediation. Why should 
such digital age products as music CDs and news reports travel any 
other route except the short one that proceeds directly from the artist 
or author to you, the listener? Recent success stories, such as the case 
of Matt Drudge, give credence to a network's inclination to bypass the 

From Places to Spaces / 99 

middle guys. Drudge, a no-name Hollywood gossip reporter, dispatched 
his insider scoops directly from a bedroom computer to a growing list 
of web readers until he had a national readership and a national brand. 
Some bands, both famous and unknown, are attempting the same thing 
in music. The laborious tasks of stamping out disks, storing them, truck- 
ing them across country, warehousing on pallets, and then fighting for 
display space in a music store all seem to evaporate as network technolo- 
gies make the transmission of music to fans direct and short. Big net, 
no middlemen, no fuss. 

The potential of disintermediation, however, looms larger than the 
actuality at the moment, and casts a large and frightening shadow. Re- 
tailers, especially, are in a panic. If anyone can log on to the web and 
comparison shop for the lowest-priced refrigerator directly from the man- 
ufacturer, what's in it for the mall stores? If anyone can order up a video 
from the studio, what's in it for the local video shop? If anyone can get 
5,000 sitcoms on demand, who needs N BC? The wholesalers are worried 
silly, but artists and creators are euphoric. The web promised (finally!) a 
way to beat the system of limited shelf space that stymied the debut of 
new novels, new albums, and new products in every type of store. With 
the web, there was unlimited shelf space. There was success in store for 

When Wired magazine began developing one of the very first com- 
mercial web sites in 1993, the phrase "unlimited shelf space" was often 
used by potential contributors. Closely linked to this phrase was "bypass- 
ing the editor": the notion that editors were superfluous intermediaries, 
and that writers and readers didn't have to be subject to the frustrating 
and degrading filtering of go-betweeners. The raw stuff would flow in its 

Technology encourages the 
proliferation of intermediates. 
Smaller companies, in greater 
numbers, are able to find 
niches where niches could not 
have existed before. 



too / New Rules for the New Economy 

full length and naked power directly from writer to reader. Our first proto- 
types convinced us that that wasn't how the net worked. The web site we 
launched and continue to build today (Wired Digital) is based on a differ- 
ent premise: that in a network economy, intermediaries have tremendous 

Everything about the web, especially the over 1 million web sites cur- 
rently in existence, suggests that the expectation that the network econ- 
omy favors disintermediation is exactly wrong. It is quite the opposite. 
Network technologies do not eliminate intermediaries. They spawn 
them. Networks are a cradle for intermediaries. 

Everywhere networks go, intermediaries follow. The more nodes, the 
more middlemen. 

It is so cheap to complete a transaction from almost anywhere, any- 
time, that tiny slivers of value, built upon microcosts of transactions, 
can be surgically inserted into all manner of processes and products. 
Because each microvalue sliver is so cheap, there is economic room for 
multiple microvalue slivers where before there was only room for one 
intermediary. As transaction costs plummet to the nanopenny level, 
some little crumb of value can be profitably added to more and more 

The combinatorial mathematics of networks also boost the oppor- 
tunities for intermediaries. By definition, every node on a network is a 
node between other nodes. The more connections there are between 
members in a net, the more intermediary nodes there can be. Every- 
thing in a network is intermediating something else. 

All nodes in a network are intermediaries. 

Someday everyone in the world will have email, and when they do, 
I don't want six billion emails a day as everyone shares what's on their 
mind. Since half the world will probably have their own businesses, and 
half of those will be start-ups, I will do everything I can to insert inter- 
mediaries between my mailbox and their mailsenders, to sort out, route, 
and filter my incoming mail. By the same token when I go to email old 
Mohammed Jhang, someone whom I have not met, who lives in Chinese 

From Places to Spaces / 101 

Turkestan, to let him know about my latest gene therapy cure for arthri- 
tis, I'll need an intermediary to find him and then to reach past his block- 
ing filters. I probably won't get through so I'll need more intermediaries 
(An advertiser? A lottery? A locating agent?) to lure him into the open, 
perhaps a pigeon-racing club, or the cineplex where he gets his movies 
from, to make him aware of my discovery. Sure, anyone can type "new 
gene therapy cure for arthritis" and turn up 32,000 hits. But you need 
intermediaries to vouch for their medical worthiness. You need inter- 
mediaries to compare my price and the others. 

The marketspace of the new economy can hold far more interme- 
diaries than the marketplace of the old could. This swelling bulk of 
intermediaries becomes an exaggerated middle. As networks prolifer- 
ate, so do overlapping clusters of intersecting interests that reside in 
the realm of the middle. In fact the hypermiddle is less a size than a 

Technology has always influenced the size of companies. The inven- 
tion of the elevator made possible high-rise buildings, which brought 
thousands of employees together into one tightly coupled physical 
space. High-rise towers launched the golden era of the centralized 
corporation. The advent of telephones on employee desks allowed the 
centralized corporation to spawn branches in neighboring cities and 
states, so that corporations grew in staff; at its peak in 1967 GM em- 
ployed some 850,000 people in all of its factories and administration 

Computers and networking technology initiated a shift in the other 
direction. What took 8 people before might be done now with 7 using 
technology. Firms that relied heavily on these technologies could reduce 

Network technology increases 

One million plus 
person Firm 

the size of the largest firms 
yet makes it more possible 
to have smaller firms while 

also increasing the number of 
midsize firms. 


102 / New Rules for the New Economy 

the number of employees. A company like Microsoft today employs a 
relatively meager 20,000 people. 

If firms got smaller with tiny doses of networking technology, then 
the logical extrapolation dictated that with large doses the firm should 
continue to reduce until it reached one employee. Some statistics tend 
to confirm this drift. Counting the 14 million self-employed, the 8.3 mil- 
lion independent contractors, and the 2.6 million temporarily employed 
in the United States, there are 25 million Americans today working as 
a unit of one. If this trend continues for a couple more decades, in the 
future everyone will be a free-agent working for themselves, and our 
country will be a free-agent nation. 

But network power cuts both ways. Although networks empower the 
solo practitioner, they also empower very large organizations. We are 
just as likely to see the rise of the Godzilla-nation as the free-agent na- 
tion. Big has not really been done yet. With the incredible place-shifting 
power of communication technologies, and a yet-to-be-tapped global 
market, the world will soon witness corporations that will dwarf the size 
of the old GM. One can imagine a truly global consultancy, such as 
Andersen Consultants or Ernst & Young, having a staff of one million 

But the big will have a different kind of bigness. 

In the space of networks, size is reckoned differently. The new organi- 
zation is flat, spread out laterally, diffuse, with nested cores, and swollen 
in the middle. Companies will change shape more than they will change 

During the industrial era, size was polarized to extremes. There was 
the "world," or the masses, and there was "I." Industrialization empha- 
sized the large-scale efficiencies of mass production, which quickly led 
to mass consumption and mass society. A drift to the large, if not the 
largest, coursed through the society. If something was worth doing well, 
it was worth doing at the scale of the world. Ambitions ran to the tallest 
skyscraper, the biggest factory, the largest dam, the longest bridge. The 
technologies of communication of that age also flexed the muscle of 
big. The printed page and the radio signal — as central to the industrial 
age as anything made of iron — informed, educated, and mobilized hun- 

From Places to Spaces / 103 

dreds of millions from a single transmission source. The power of big 
was never so nicely diagrammed as in the TV: a tiny spark amplified to 
reach billions of people over thousands of miles at once, in unison. 

The "I" on the other hand was fed by mass advertising and the cult 
of the individual, which sprang up after the Second World War. A fasci- 
nation with psychoanalysis, with the ego, with personal expression and 
self-esteem, culminated in the "Me decades" starting in the 1970s. The 
first bits of the information age fed this whetted appetite for further 
individualism. We got personal computers amid personal trainers, per- 
sonal advisers, and expectations of everything personalized. 

Left behind by industrialization was the realm of the middle. The 
middle was once where everyone lived and most things happened. This 
size once flourished in geographical towns (with tens of thousands), 
ordinary communities (with thousands) and neighborhoods (with hun- 
dreds). Places embraced the middle very well. 

But the vitality of places was weakened by a bifurcating pressure to 
make things either huge for the masses or solo for the personal. The 
logic of the modern was: it must appeal to everyone, or to only me. 
Neither mass society nor the cult of the personal was equipped to deal 
with the peculiar dynamics of the middle. There was little economic or 
technological support for aiming an innovation at 5,000 people. Nei- 
ther broadcast nor the personal chip, for example, really knew how to 
do towns and neighborhoods. 

The network economy encourages the middle space. It supplies 
technology (which the industrial age could not) to nurture mid-sized 

Technology for mass production will remain. Technology to custom- 
ize the personal will accelerate. But for the first time we have technol- 
ogy naturally suited for a size smaller than mass and greater than the 
self. We have a technology of net and web, stuffed with middleness. 

Futurist Alvin Toffler says it best: "The era of mass society is over." 
He ticks off the casualties: "No more mass production. No more mass 
consumption. No more mass education. No more mass democracy. No 
more weapons of mass destruction. No more mass entertainment." 

In its place: a world of demassified niches. Niche production, niche 

104 / New Rules for the New Economy 

consumption, niche diversion, niche education. Niche world. Communi- 
ties. Affinity groups. Clubs. Special Interest Groups. Clans. Subcultures. 
Tribes. Cults. (There is nothing Utopian about this world.) Instead of the 
mass technology of broadcast TV, we now have net-centric alternatives. 

We see the problem of the unserved middle most clearly in com- 
munication media. Say you wanted to talk to 10,000 people once a day. 
Unless you wanted to speak to a group bounded by geography — a small 
town, or a subset of a small city — you'd be stymied. You can broad- 
cast to a million unknowns hoping you happen to catch some of the 
10,000 you want, or you can slowly collect the names of individuals 
who contact you, one by one, and transmit to them directly. Neither way 
is elegant. Retailers call this the "hard middle," because it is so hard to 
service a group of 10,000 customers who share a common interest but 
not a common geography. Retailers crave the middle because they have 
learned that you can't appeal to folks with a simple naked exchange 
of money. You need other essentials of marketplaces — conversations, 
loitering, flirting, people-watching. Before you can have commerce, you 
need a community, a middle number of interacting people. 

It takes a village to make a mall. Community precedes commerce. 

The hard middle is a pervasive problem. We have tools to access 
the ideas in one person's book: its index and table of contents. We have 
tools to access the ideas of a library of millions of books: its card cata- 
log. But we don't have tools to access ideas in the hard middle, the re- 
gion of expertise in 10,000 scholars, or 1,000 books. Where do you go 
for a listing of key words, key subjects, and key ideas for the complete 

Services and goods for 
previously ignored community- 
and town-sized groups, also 
known as the hard middle, can 
make economic sense with 
network technology. 







From Places to Spaces / 105 

literature about the U.S. Civil War? 

Until recently, nowhere. Today, the symbol WWW immediately 
pops into our mind. We see in the World Wide Web the promise of 
creating a viable midlands. In this particular case the hyperlinking of 
all documents could be filtered and categorized to generate an index to 
middle-sized knowledge. 

The electronic space encourages middle communities. Unlike either 
broadcast or PC chips, a network fosters the energy that flows from 
the friend of a friend to the friend of a friend. Network architecture can 
find, cultivate, persuade, manage, and nourish intermediate-sized au- 
diences and communities focused on common interests. Niche mar- 
kets, in other words. Magazines, rooted in the postal system network, 
have served niche markets for a century. But the emerging broadband 
network offers many relationships the postal network (and magazines) 
could not: spontaneous reply, fully symmetrical bandwidth, true peer- 
age communication, archives, filtering, community memory, etc. 

Network logic supports the middle space in several ways. 

First, the plunging costs of information make it possible to find, 
then connect, two passions together far more efficiently than in the 
past. Once connected, cheap transactions keep the connection flour- 

Second, symmetrical messaging, text, video, audio, 3D spaces, ar- 
chives, privacy controls, all enhance the once slim attractions of a vir- 
tual community experience, keeping the community longer. 

Third, the ubiquity of e-money in the network means that every niche 
has the ability to initiate an indigenous economy. The knowledge that 
dog breeders used to swap among themselves can become lucrative to 
the community as a whole when plugged into the network economy. 

Fourth, the border-collapsing nature of the network economy means 
embryonic communities can theoretically draw upon a larger pool of 
potential members: all 6 billion humans. The law of increasing returns 
can feed a small interest into a mid-sized interest. Whereas once there 
was a lone fanatic for every notion, now there is a devoted web site for 
every fanatic notion; soon there can be 10,000 fellow enthusiasts for 
every fascination. 

The network economy has set into motion the power of hobby tribes 
and informed peers. Amateurs, plugged into the net, discover comets, 

106 / New Rules for the New Economy 

find fossils, and track bird migrations better than pros. By network- 
ing their interests and passing tips around, amateurs also create software 
in languages so new that they are taught in no classrooms. These self- 
organized communities, unleashed from their obscurity by the net, are 
the new authorities. 

Silent movie buffs and meteorite collectors are quickly gathering on 
the net because the net's space coheres them into a middle market, 
served at last by business and sales aimed directly at them. Egyptolo- 
gists or cancer patients can create a mid-sized agora (neither insignifi- 
cant nor huge) for ideas and knowledge. There was no place in mass 
markets for the niche communities of ethnic tribes or Klingon speakers, 
but the network economy constructs a space for them. 

But mass broadcast TV and big print publishing are not going away. 
The chief advantage of peerage networks — that information flows in 
ripples through a web of equal nodes — is also the chief weakness of 
networks. Information can only advance by indirect osmosis, passing 
along like gossip. The web becomes a thicket of obstacles preventing 
simultaneous dissemination to all parts. 

The net shifts from mass media to mess media. 

On the new mess media, rumor, conspiracy, and paranoia run ram- 
pant. These have always been the downsides of communities; network 
midlands will also have to learn to deal with impenetrable webs and 
paranoic sensibilities. Capitalizing on these disadvantages, broadcast 
will thrive symbiotically within the network economy. Sometimes real- 
time signals en masse are needed and wanted. Broadcast's flyover will 
be used, or material will be directly pushed to users. The web needs 
broadcast to focus attention, and broadcast needs the web to find com- 

Network technology expands all sizes. It enables the biggest to be- 
come bigger and the smallest to become smaller. In the near future 
we can expect to see institutions larger than they have ever been, and 
smaller than they have ever been. For instance, a few banks will grow 
monstrously large at the same time that other banks shrink to the size 
of a smart card in a wallet and increase their numbers by millions. The 
middle expands, too. That hard-to-reach territory that once was well 

From Places to Spaces / 107 

served by places is rejuvenated. 

The space of network nodes and flows creates new social organiza- 
tions, new forms of companies, in oddball sizes, and in unconventional 
arrangements. We are on the brink of entering a world where almost 
any shape of business is possible. 


The only side a network has is outside. Like a rapidly spinning gal- 
axy, the net creates an unrelenting force that sends everything from the 
inside toward the outer edges. Since little is left inside, the action is 
thrown to the perimeter. Rather than buck this centripetal force, com- 
panies should consider outsourcing chores to other equally amorphous 
networked companies. The most powerful capitulation to the net's out- 
ward spin is to outsource seemingly core activities. For instance, some 
airline companies outsource the business of air-freight hauling, even 
though the cargo is carried by their own planes. There are 1 ,001 reasons 
why core outsourcing can't be done, but 999 of them ignore the cen- 
tripetal force of the network economy. 

Prepare for flash crowds. Electronic spaces unhinge a crowd of visi- 
tors: They can appear in a flash and then leave in a flash. During the 
chess match between Deep Blue and Gary Kasparov, the IBM web site 
welcomed 5 million visitors. When the match was over the site was 
empty. On the eve of the 1996 U.S. elections, the CNN web site experi- 
enced 50 million attempts to log on. The next day, the crowd was gone. 
One day a flash crowd is pounding at the doors, the next day they have 
vanished. The mass audience has transformed itself into a wave that 
swishes around from one hot spot to another. But the nature of spaces 
is that in order to accommodate a flash crowd when they do come, you 
have to be ready, tooled up. 


Seeking Sustainable Disequi- 

In the industrial perspective, the economy was a machine that was to 
be tweaked to optimal efficiency, and once finely tuned, maintained in 
productive harmony. Companies or industries especially productive of 
jobs or goods had to be protected and cherished at all costs, as if these 
firms were rare watches in a glass case. 

As networks have permeated our world, the economy has come to 
resemble an ecology of organisms, interlinked and coevolving, con- 
stantly in flux, deeply tangled, ever expanding at its edges. As we know 
from recent ecological studies, no balance exists in nature; rather, as 
evolution proceeds, there is perpetual disruption as new species dis- 
place old, as natural biomes shift in their makeup, and as organisms 
and environments transform each other. 

Even the archetypal glories of hardwood forests or coastal wetlands, 
with their apparent wondrous harmony of species, are temporary feder- 
ations on the move. Harmony in nature is fleeting. Over relatively short 
periods of biological time, the mix of species churns, the location of 
ecosystems drift, and the roster of animals and plants changes as they 
come and go. 

So it is with network perspective: companies come and go quickly, 
careers are patchworks of vocations, industries are indefinite groupings 
of fluctuating firms. 

Change is no stranger to the industrial economy or the embryonic 
information economy; Alvin Toffler coined the term "future shock" in 
1970 as the reasonable response of humans to an era of accelerating 

No Harmony, All Flux / 109 
But the network economy has moved from change to flux. 

Change, even in its shocking forms, is rapid difference. Flux, on the 
other hand, is more like the Hindu god Shiva, a creative force of destruc- 
tion and genesis. Flux topples the incumbent and creates a platform for 
more innovation and birth. This dynamic state might be thought of as 
"compounded rebirth." And its genesis hovers on the edge of chaos. 

Donald Hicks of the University ofTexas studied the half-life of Texan 
businesses for the past 22 years and found that their longevity has 
dropped by half since 1970. That's change. But Austin, the city in Texas 
in which new businesses have the shortest expected life spans, also has 
the fastest-growing number of new jobs and the highest wages. That's 

Hicks told his sponsors in Texas that "the vast majority of the 

employers and employment on which Texans will depend in the year 
2026 — or even 2006 — do not yet exist." In order to produce 3 million 
new jobs by 2020, 15 million new jobs must be created in all, because 
of flux. "Rather than considering jobs as a fixed sum to be protected 
and augmented, Hicks argued, the state should focus on encouraging 
economic churning — on continually recreating the state's economy," 
writes Jerry Useem in Inc., a small-business magazine that featured 
Hick's report. Ironically, only by promoting flux can long-term stability 
be achieved. 

When flux is inhibited, slow death takes over. Contrast Texas and 
the other 49 states with the European Union. Between 1980 and 1995 
Europe protected 12 million governmental jobs, and in the process 

The number of old jobs lost 
increases, but not as fast as the 

number of new jobs created. 
More important, the spread 
of gained jobs over lost jobs 

no / New Rules for the New Economy 

of fostering stasis lost 5 million jobs in the private sector. The United 
States, fostering flux, saw a staggering 44 million old jobs disappear 
from the private sector. But 73 million new jobs were generated, for a 
net gain of 29 million, and in the process the United States kept its 
12 million government jobs, too. If you can stand the turmoil, flux tri- 

This notion of constant flux is familiar to ecologists and those who 
manage large networks. The sustained vitality of a complex network re- 
quires that the net keep provoking itself out of balance. 

If the system settles into harmony and equilibrium, it will eventually 
stagnate and die. 

Innovation is disruption; constant innovation is perpetual disrup- 
tion. This seems to be the goal of a well-made network: to sustain a 
perpetual disequilibrium. A few economists studying the new economy 
(among them Paul Romer and Brian Arthur) have come to similar con- 
clusions. Their work suggests that robust growth sustains itself by pois- 
ing on the edge of constant chaos. "If I have had a constant purpose it 
is to show that transformation, change, and messiness are natural in 
the economy," writes Arthur. 

The difference between chaos and the edge of chaos is subtle. Apple 
Computer, in its attempt to seek persistent disequilibrium and stay in- 
novative, may have tottered too far off-balance and let itself unravel to- 
ward extinction. Or, if its luck holds, it may discover a new mountain to 
ascend after a near-death experience. 

The dark side of flux is that the new economy builds on the constant 
extinction of individual companies as they're outpaced or morphed 
into yet newer companies in new fields. Industries and occupations 
also experience this churn. Even a sequence of rapid job changes for 
workers — let alone lifetime employment — is on its way out. Instead, ca- 
reers — if that is the word for them — will increasingly resemble networks 
of multiple and simultaneous commitments with a constant churn of 
new skills and outmoded roles. About 20% of the American workforce 
already have an arrangement other than the traditional employee rela- 
tionship with one employer. And 86% of them claim to be happy about 

No Harmony, All Flux / m 


Nowhere is this trend toward constant flux more evident than in the 
entertainment industry centered in southern California. Hollywood's 
"cultural-industrial complex" includes not just film, but also music, multi- 
media, theme park design, TV production, and commercials. 

Giant film studios no longer make movies. Loose entrepreneurial 
networks of small firms make movies, which appear under the names 
of the big studios. In addition to various camera crews, about 40 to 50 
other firms, plus scores of freelancers, connect up to produce a movie; 
these include special effects vendors, prop specialists, lighting techni- 
cians, payroll agencies, security folks, and catering firms. They convene 
as one financial organization for the duration of the movie project, and 
then when the movie is done, the company disperses. Not too much 
later they will reconvene as other movie-making entities in entirely new 
ad hoc arrangements. Cyberpunk author Bruce Sterling has his own in- 
imitable way of describing the flux of "Hollywood film ad-hocracies." 
To make a movie, he says, "You're pitchforking a bunch of freelancers 
together, exposing some film, using the movie as the billboard to sell 
the ancillary rights, and after the thing gets slotted to video, everybody 
just vanishes." 

Fewer than ten entertainment companies employ more than 1,000 
employees. Of the 250,000 people involved in the entertainment com- 
plex in the Los Angeles region, an estimated 85% of the firms employ 
10 people or fewer. Joel Kotkin, author of a landmark 1995 article in Inc. 
magazine entitled, "Why Every Business Will Be Like Show Business," 
writes: "Hollywood has mutated from an industry of classic huge, verti- 
cally integrated corporations into the world's best example of a network 
economy. Eventually, every knowledge-intensive industry will end up in 
the same flattened, atomized state. Hollywood just has gotten there 

Silicon Valley is not far behind. The ICE businesses — information, 
communication, and entertainment — all rely on speed and flexibility to 
survive in a self-made speedy and flexible environment. Things move 
so fast that even a corporation — any corporation — seems too rigid and 
staid. You can't alter bureaucratic structure fast enough, so don't even 
build one to begin with. 

112 / New Rules for the New Economy 

Networks are immensely turbulent and uncertain. The prospect of 
constantly tearing down what is now working will make future shock 
seem tame. As creatures of habit we will challenge the need to undo es- 
tablished successes. We are sure to find exhausting the constant, fierce 
birthing of so much that is new. The network economy is so primed to 
generate self-making newness that we may experience this ceaseless 
tide of birth as a type of violence. 

In a poetic sense, the prime goal of the new economy is to undo — 
company by company, industry by industry — the industrial economy. 

In reality, of course, the industrial cortex cannot be undone. But a 
larger web of new, more agile, more tightly linked organizations can 
be woven around it. These upstart firms bank on constant change and 

Change itself is no news, however. Ordinary change triggers yawns. 
Most change is mere churn, a random disposable newness that accom- 
plishes little. Churn is the status quo for these times. At the other extreme, 
there is change so radical that it topples the tower. Like inventions that fail 
because they are way ahead of their times, it is possible to reach too far 
with change. 

What the network economy coaxes forth is a selective flux. The right 
kind of change, in the right doses. In almost all respects this kind of 
change is what we mean by innovation. 

The world "innovation" is so common now that its true meaning is 
hidden. A truly innovative step is neither too staid and obvious, nor too 
far out. The innovative step is change that is neither random direction- 
less churn, nor so outrageous that it can't be appreciated. We wouldn't 
properly call just another variation of something an innovation. We also 
wouldn't call a shift to something that only worked in theory, but not prac- 
tice, or that required a massive change in everyone else's behavior to work, 
an innovation. 

A real innovation is sufficiently different to be dangerous. It is change 
just this side of being ludicrous. It skirts the edge of the disaster, with- 
out going over. Real innovation is scary. It is anything but harmonious. 

The selective flux of innovation permeates the network economy the 

No Harmony, All Flux / 113 

way efficiency permeated the industrial economy. The innovative flux is 
not merely dedicated to devising more interesting products, although 
that is its everyday chore. Innovation and flux saturate the entire emerg- 
ing space of the new economy. Innovation premiers in: 

New products 

New categories of products 

New methods to make old and new products 

New types of organizations to make products 

New industries 

New economies 




Because large systems must 
tread a path between the 
ossification of order and the 
destruction of chaos, networks 
tend to be in a constant state of 
turmoil and flux. 

All of these will twist and turn as change, dangerous change, spirals 
through them. This is why there is such a maniacal fuss about inno- 
vation. When management gurus drone on about the imperative of in- 
novation, they are right. Firms still need excellence, quality of service, 
reorganization, and real time, but nothing quite embodies the ultimate 
long-term task in this new economy as the tornado of innovation. 

This is where life lives, between the rigid death of planned order 
and the degeneration of chaos. Too much change can get out of hand, 
and too many rules — even new rules — can lead to paralysis. The best 
systems have this living quality of few rules and near chaos. There is 
enough binding agreement between members that they don't fall into 
anarchy, yet redundancy, waste, incomplete communications, and inef- 
ficiency are rife. 

114 / New Rules for the New Economy 

My own involvement in groups that launched successful change, 
and my secondhand knowledge of many, many others involved in world- 
changing innovation, convinces me that all of these ensembles teetered 
on the brink of chaos at their peak performance. Whatever front they put 
up to the public or investors, behind the scenes most of the group ran 
around screaming "It's pathologically out of control here!" Every orga- 
nization is dysfunctional to some degree, but innovative organizations, 
in their moment of glory, tend to slide toward uncoordinated commu- 
nication, furious bouts of genius, and life-threatening disorganization. 
Everyone involved swears they will institute just enough structure to 
prevent flameout in the future, but I've never seen radical innovation 
emerge from an outfit that wasn't halfway to unraveling at the epicenter 
of change. Most of the studies of optimal evolution in complex systems 
confirm this view. The price for progressive change in maximum doses 
is a dangerous (and thrilling) ride to the edge of disruption. 

Although many groups experience these grand moments when cre- 
ativity flows and things get done well, the holy grail in business and life 
is to find ways to sustain these periods of supreme balance. Sustaining 
innovation is particularly tricky since it flows out of creative disequilib- 

To achieve sustainable innovation you need to seek persistent 
disequilibrium. To seek persistent disequilibrium means that one must 
chase after disruption without succumbing to it, or retreating from it. 

A company, institution, or individual must remain perched in an 
almost-falling state. In this precarious position it is inclined to fall, but 
continually catches itself and never quite topples. Nor does it anchor 
itself so that it cannot tip. It sort of skips along within reach of disaster, 
but uses the power of falling to propel itself forward with grace. A lot of 
people compare it to surfing; you ride a wave, which is constantly tum- 
bling, and perched on top of this continually disintegrating hill of water, 
you harness its turbulence into forward motion. 

Innovation is hard to institutionalize. It often needs to bend the rules 
of its own creation. Indeed, by definition innovation means to break 
away from established patterns, which means that it tends to jump over 

No Harmony, All Flux / 115 

formulas. In periods of severe flux, such as the transition we are now in 
between a resource-based economy and a connected-knowledge one, 
change enters other levels. 

Change comes in various wavelengths. There are changes in the 
game, changes in the rules of the game, and changes in how the rules 
are changed. 

The first level — changes in the game — produces the kind of changes 
now visible: new winners and losers. New businesses. New heroes. We 
see the rise of Wa I -Marts, and of Nucor steelmaking. 

The second level — changes in the rules of the game — produces new 
kinds of business, new sectors of the economy, new kinds of games. 
From this type of change comes the Microsofts and Amazon. corns. 

The third level of change, which we are now entering, whips up 
changes in how change happens. Change changes itself. While the new 
economy provokes change in the first two levels — all those new busi- 
ness and business sectors — its deepest consequence is the way it alters 
change. Change accelerates itself. It morphs into creative destruction. 
It induces flux. It disperses into a field effect, so you can't pinpoint 
causes. It overturns the old ways of change. 

Change in technological systems is becoming more biological. This 
will take a lot of getting used to. Networks actually grow. Evolution can 
really be imported into machines. Technological immune systems can 
be used to control computer viruses. This neobiologicalism seeps di- 
rectly into our new economy. More and more, biological metaphors are 
useful economic metaphors. 

The image of the economy as something alive is powerful. And it 
is hardly New Age hokum. Adam Smith himself alluded to aliveness 
with his unseen "hand." Karl Marx often referred to the organic nature 
of the economy. Even the legendary no-nonsense economist Alfred 
Marshall wrote in 1948 that "the Mecca of the economist lies in eco- 
nomic biology." Marshall was writing at the peak of the industrial econ- 
omy. The first stirrings of the coming power of information were just 
being felt. 

Living systems are notoriously hard to model and theorize about, 

n6 / New Rules for the New Economy 

and even more difficult to predict. Until very recently economics has 
gravitated to an understanding that settled on an equilibrium, primarily 
because anything more complex was impossible to calculate. Ironically, 
the very same computer technology, which has roused flux in the econ- 
omy, is now used to model it. With powerful chips, dynamic, learning, 
self-feeding theories of the economy can be mapped out. 

Both in our understanding of it, and in reality, the network economy 
is a place that harbors little harmony or stasis. Instead, it is a system 
that will increasingly demand flux and innovation. The art of judicious 
change, of the dangerous difference, will be rewarded in full. 


Skate to the edge of chaos. Pay the price of radical churn: endorse 
redundancy, inefficiency, and set the neatniks up in arms. If people 
are not complaining about how chaotic the place is, you've got a prob- 
lem. It isn't necessary that the whole organization be in chaos (one 
hopes the accounting department is spared), but that key parts are. The 
duty may want to be rotated. Realistically, disequilibrium is very difficult 
to maintain. 

Exploit flux instead of outlawing it. The traditional practice of tele- 
phony tries to eliminate noise and uncertainty by creating an optimally 
short and uninterrupted circuit between caller and callee. It assumes a 
stable route. The internet, on the other hand, counts on chaotic change, 
and it will overtake the entire phone system soon. It sends messages 
(including voice) in fragmented bits scattered along redundant routes, 
and then resends whatever the haphazard process loses to noisy lines. 
Rather than prohibit errors, network logic assumes errors and learns 
from the chaotic flux. Find where the flux is, and ride it. 

You can't install complexity. Networks are biased against large- 
scale drastic change. The only way to implement a large new system is 
to grow it. You can't install it. After the collapse of the Soviet Union, 
Russia tried to install capitalism, but this complex system couldn't be 
installed; it had to be grown. The network economy favors assembling 
large organizations from many smaller ones that keep their autonomy 

No Harmony, All Flux / 117 

within the large. Networks, too, need to be grown, rather than installed. 
They need to accumulate over time. To grow a large network, one needs 
to start with a small network that works, then add more sophisticated 
nodes and levels to it. Every successful large system was once a suc- 
cessful small system. 

Preserve the core, and let the rest flux. In their wonderful bestseller 
Built to Last, authors James Collins and Jerry Porras make a convinc- 
ing argument that long-lived companies are able to thrive 50 years or 
more by retaining a very small heart of unchanging values, and then 
stimulating progress in everything else. At times "everything" includes 
changing the business the company operates in, migrating, say, from 
mining to insurance. Outside the core of values, nothing should be ex- 
empt from flux. Nothing. 


Start with Technology, End 
with Trust 

The central economic imperative of the industrial age was to increase 
productivity. Every aspect of an industrial firm — from its machines to 
its organizational structure — was tailored to enhance the efficiency of 
economic production. But today productivity is a nearly meaningless 
byproduct in the network economy. 

The central economic imperative of the network economy is to 
amplify relationships. 

Every aspect of a networked firm — from its hardware to its distrib- 
uted organization — is created to increase the quantity and quality of 
economic relationships. 

The network is a structure to generate relationships. Networks haul 
relations the way rivers once hauled freight. When everything is con- 
nected to everything else, relationships are rampant. Each variety of 
connection in a network begets a relationship. Between firms and other 
firms. Between firms and customers. Between customers and the gov- 
ernment. Between customers and other customers. Between employ- 
ees and other firm's employees. Between customers and machines. 
Between machines and machines, objects and objects, objects and cus- 
tomers. There is no end to the complexity and subtlety of relationships 
spawned in a network economy. 

Each of these types of relationship has its own specific dynamics 
and quirks. And each is nurtured by a particular type of technology. The 
technologies of jelly bean chip and boundless bandwidth are, in the 

Relationship Tech / 119 

end, relationship technologies. "We need to shift away from the notion 
of technology managing information and toward the idea of technol- 
ogy as a medium of relationships," writes Michael Schrage in Shared 
Minds, a book about the new technologies of collaboration. Despite the 
billions of bits that information hardware can process in a second, the 
only matter of consequence silicon produces are relationships. 

Of course reputation and trust have been essential in all economies 
of the past, so what's new? Only two things: 

■With the decreased importance of productivity, relationships and 
their allies become the main economic event. 

■Telecommunications and globalism are intensifying, increasing, 
and transforming the ordinary state of relationships into an excited 
state of hyperrelations — over long distances, all the time, all places, all 
ways. It's not Kansas anymore; it's Oz. 

Relationships among more than two people can be structured as hier- 
archies or as networks. In hierarchies, members are ranked in privilege rel- 
ative to one another; in networks, members relate as peers — counterparts 
of similar power and opportunity. In previous ages the most intelligent 
way to construct a complex organization in the absence of plentiful infor- 
mation was to build a hierarchy. Rank is a clever and workable substitute 
for ubiquitous real-time information. When information is scarce, follow 

When information is plentiful, peers take over. 

In fact, as reliable information becomes common, almost noth- 
ing can stop peers from taking over. As computers and communica- 
tions unloose a million bits of information in every dimension, we see 
peerages form in every dimension. Email and voice mail have brought 
peerage pressure to corporations. The flattening effect of network tech- 
nologies and the subsequent turmoil in the organization of business 
firms is well recognized. But in many ways the emerging peerlike rela- 
tionship between boss and staff is probably the least interesting and 
least important of all the relational changes now taking place. 

More consequential is the relation between customer and firm, 

120 / New Rules for the New Economy 

which is yielding to the peer effect. More important still is the relation 
between firm and firm, which is shifting rapidly to a web of overlap- 
ping nets. Still more vital is the lateral relation between customer and 
customer, which is just beginning to brew. Finally, the elevated relation 
between customers (rather than citizens) and the rest of society, a re- 
lation that is just now being defined, may be the most important of 
all, as economics elbows its way into every activity. As an example of 
expanding relationships, consider the traditional relationship between 
customer and a firm, roles that have been around forever. In the net- 
work economy the separation between customers and a firm's employ- 
ees often vanishes. 

When you pump your own gas at the filling station, are you working 
for the gas station or for yourself? Are all those people waiting in line 
behind the ATM machine more highly evolved bank customers or just 
nonpaid bank tellers? When you take a pregnancy test at home, are you 
a savvy self-helper, or part of the HMO's plan to reduce costs? The an- 
swer, of course, is both. When everyone is linked into a web, it's impos- 
sible to tell which side you are on. 

Web sites and 800 numbers can invite customers into the internal 
knowledge banks of a company to almost the same degree of "inside" 
that employees stationed on the other side of the line enjoy. Many tech- 
nical companies post the same technical information and diagnostic 
guidelines on their help sites that their own support professionals work 
from when you call their hotline. You can have someone trained to look 
up and then read troubleshooting answers for you, or if you are in a 
hurry, you can try to find it yourself. Who's working for whom? 

At the same time the complexity of an employee contract, particularly 
in high-tech fields, is quickly approaching the complexity of a contract 
with an outside vendor. Stock options, vestment periods, a thousand 
insurance and benefit combinations, severance clauses, noncompete 
agreements, performance goals — each one uniquely negotiated for each 
person. A highly paid technical employee becomes in essence a perma- 
nent consultant. He or she is an outsider on staff. 

Outsiders act as employees, employees act as outsiders. New re- 
lationships blur the roles of employees and customers to the point of 
unity. They reveal the customer and company as one. 

Relationship Tech / 121 

This close coevolution between users and producers is more than 
poetry. There is a very real sense in which the owners of the phone 
network sell nothing at all but the opportunity for customers to have 
conversations among themselves — conversations which the users 
themselves create. You could say the phone companies cocreate phone 
service. This blurring between origin and end spills over into the birth of 
online services, such as AOL, where most of what is now sold is being 
created by the customers themselves in the form of postings and chat. 
It took years for AOL to figure this out; they initially wanted to follow 
industrial logic and sell downloadable information created at great ex- 
pense by professionals. But once they realized that the customers acted 
like employees by making the goods themselves, the online companies 
started making money. 

The net continues to break down the old relationships between pro- 
ducers of goods and consumers of services. Now, producers consume 
and consumers produce. 

In the network economy, producing and consuming fuse into a sin- 
gle verb: prosuming. 

"Prosumer" is a term coined by Alvin Toffler in 1970 in his still- 
prescient book Future Shock. (Toffler first found his insights as a futurist 
while working for the telephone networks.) Today prosumers are every- 
where, from restaurants where you assemble your own dinner, to medi- 
cal self-care arenas, where you serve as doctor and patient. 

The future of prosumerism can be seen most clearly online, where 
some of the very best stuff is produced by the people who consume it. 
In a multiplayer game like Ultima Online, you get a world with a view 
and some tools and then you're on your own to make it exciting. You 
invent your own character, develop his or her clothing or uniform, ac- 
quire unique powers, and build the surrounding history. All the other 
thousands of characters you interact with have to be sculpted by other 
prosumers. The adventures that unfurl are cocreated entirely by the 
participants. Like a real small town, the joint experience — which is all 
that is being sold — is produced by those who experience it. 

These eager world makers could be viewed as nonpaid content mak- 
ers; in fact, they will pay you to let them make things. But the same 

122 / New Rules for the New Economy 

world could also be viewed as full of customers who have been given 
tools with which they can complete a product to their own picky speci- 
fications. They are rolling their own, just as they like. In the new econ- 
omy-speak, this is known as mass customization. 

The premise of mass customization is simple. Technology allows 
us to target the specifications of a product to a smaller and smaller 
group of people. First we can make Barbie dolls in the millions. Then 
with more flexible machinery and computer-generated target market- 
ing we can make ethnic Barbies, in the hundreds of thousands. Then 
with improved market research and advanced communications we can 
make subculture Barbies, biker and grunge Barbies in the thousands. 
Eventually, with the right network technology, we can make the personal 
Barbie, the Barbie of you. In fact there is a company in Littleton, Colo- 
rado, that currently makes the "My Twinn" baby doll to look like the 
doll's owner. The doll's eye and hair color and hair style are matched to 
a photo of the child who will own it. 

The most interesting aspect of prosuming and mass customiza- 
tion — of this new relationship between the customer and the firm — is 
that because customers have a hand in the creation of the product they 
are more likely to be satisfied with the final result. They have taught the 
firm how to please them, and the firm now has a customer with a much 
fuller relationship with them than before. 

But creating a product for "a niche of one" is only a small part of 
the transformation of the customer relationship. (Detroit car mak- 
ers learned long ago to create customized cars, but that was all they 
learned.) Network technologies such as data mining, smart cards, and 
recommendation engines are escalating the levels of relationships 
available to customers. 

The drive to relate to the consumer intimately, to the point of encour- 
aging prosuming, can be articulated as a series of progressive goals: 

1) to create what the customer wants 

2) to remember what the customer wants 

3) to anticipate what the customer wants 

4) finally, to change what the customer wants 

Each of the missions elevates the firm's commitment to the cus- 

Relationship Tech / 123 
tomer and raises the customer's involvement with the firm. 

■ To create what the customer wants. Sometimes this will mean sim- 
ple customization: You want a vacation experience unlike anyone else's. 
Sometimes this will mean mass customization: You want a pair of 
jeans that fit your unusual leg shape at the same price as a regular pair 
of jeans. Sometimes mass customization is not what you want. The 
huge fashion industry makes its fortune on people's dependable desire 
for wearing what everyone else is wearing. Sometimes what you want is 
semicustomized: You read the New York Times because everyone else is 
reading it, but you don't read the sports section or the obits. You want 
not the Daily Me, but the Daily You and Me, the publication your 12 clos- 
est friends read. 

A huge tide of information and trust must flow between users and 
creators in order to create exactly what the customer wants. The inter- 
face technology must be clear and simple for people to convey their 
desires. The nightmarish logistics of delivery and production must be 
managed with exactness. The most difficult aspect of this mission may 
not be the order form but the manufacturing; anything that involves at- 
oms is much harder to customize than first thought. But any solutions 
surely involve networked technologies. 

■ To remember what a customer wants. A majority of the things we 
do, we do repetitively. We engage in the same tasks every day, or once 
a week, or every now and then. Things done iteratively have different 
dynamics from things done once. Little events become important. We 
bristle at having to remember our password again, or having to recite 
how we like our coffee one more time, or having to explain again what 
we don't like about bathing suits. Humans who learn our quirks (and 
they must be learned) earn our favor. Firms who learn our quirks will 
also earn our favor. 

The technology of tracking and interpreting our whims heightens 
the relationships between firm and consumer. The firm must expend 
great effort to remember your preferences, but you also expend effort 
in teaching them so they can remember. And the remembering must be 
intelligent. You order the same espresso every day, except when it's cold 
out, and then you order a latte. The relationship tech has to be robust 

124 / New Rules for the New Economy 

enough to be taught these distinctions. 

Don Peppers and Martha Rogers, authors of the amazingly insightful 
Enterprise One to One, state: "A Learning Relationship between a customer 
and an enterprise gets smarter and smarter with every individual inter- 
action, defining in ever more detail the customer's own individual needs 
and tastes. Every time a customer orders her groceries by calling up last 
week's list and updating it, for instance, she is in effect 'teaching' the ser- 
vice more about the products she buys and the rate at which she con- 
sumes them." In reward for the firm's effort at being taught, the firm and 
the customer develop a committed relationship. Peppers and Rogers con- 
tinue: "The shopping service will develop a knowledge of this particular 
customer that is virtually impossible for a competitive shopping service 
to duplicate, providing an impregnable lock on the customer's loyalty." 
At the same time, the customer has invested so much in the relationship 
that the cost of switching to another vendor gets steeper by the day. Pep- 
pers and Rogers: "When the florist sends a note reminding you of your 
mother's birthday, and offers to deliver flowers again this year to the same 
address and charged against the same credit card you used with the florist 
last year, what are the chances that you will pick up the phone and try to 
find a cheaper florist?" 

Since a relationship involves two members investing in it, its value 
increases twice as fast as one's investment. 

The cost of switching relationships is high. Leaving, you surrender 
twice. You give up all that the other has put into the relationship, and 
you give up your own investment. In other words, the cost of loyalty is 
low. Thus we see the huge success of frequent flyer and frequent buyer 
programs, made possible by the coinvestment that airlines and super- 
markets put into them. Affiliation cards are another example of the rela- 
tionship extension; the costs of tracking purchases are so low compared 
to the value of belonging — for both sides — that it pays to invent other 
ways to spread the idea. And the phone companies' attempts at "friends 
of friends" calling circles are likewise clever experiments in exploiting net- 
worked relationships. 

Smarter relationship technology, or "R-tech" as economist Albert 
Bressand calls it, will bind the connections between customers and 

Relationship Tech / 125 

firms more tightly still. An emerging standard called P3P offers a uni- 
form way to store an individual's profile containing name, address, and 
so forth as well as preferences, including preferences of what they will 
reveal. If you shop a lot you will carry a "passport profile" based on the 
P3P protocol (or one similar) encased in your smart card or online in 
a browser. You exchange it with the vendor during a commercial trans- 
action. The passport technology will help firms remember you as you 
teach them how to serve you and earn your favor. 

The portability of preferences is a big deal. As the net creeps into yet 
more aspects of commerce, the ability to track identities and desires 
across different systems will be key. The Ritz-Carlton Hotel is justifiably 
proud of its ability to customize rooms for you anywhere in its thirty- 
one-hotel chain, without having to ask you. Some airlines can do the 
same. That still leaves a lot of room for success in creating relation- 
ships in the network economy as a whole. 

■ To anticipate what a customer wants. Creating tailored products for 
people is the first step of R-tech. The second is recalling their prefer- 
ences intelligently. The third step is anticipating what they'll want even 
before they articulate it. That's a measure of any great relationship. You 
can boast you really know someone when you can say, "I know she'll 
love this book!" 

The most elemental form of anticipatory tech extrapolates likes and 
dislikes from the customer's past usage patterns. But the most powerful 
forms of R-tech rely on the swarm of other customers and the latent re- 
lationships between them to anticipate desires. A great example of this 
social R-tech was developed by Firefly, a web-based recommendation 
engine (recently sold to Microsoft). Here's how it works in brief: I tell 
MyLaunch, Firefly's musicvendor, myten favorite musicalbums. It takes 
my recommendations and compares them with the top ten recommen- 
dations of 500,000 other Firefly members interested in music. Firefly 
then figures out where in "taste space" I belong. It places me near the 
few people who like the same albums I do. Despite an overlap of taste 
with them there will be a few albums my neighbors mentioned that I 
did not. Firefly will alert me to those albums, and conversely will tell 
my taste neighbors about the albums I mentioned that they had not. 
These are the albums I should try because it anticipates I will like 

126 / New Rules for the New Economy 


It's remarkable how well this simple system works. I eerily recom- 
mended great albums that I liked. There are many refinements to in- 
crease its power. I can "teach" the system by grading the results it gave 
me. Perhaps it recommended Pete Seeger because I named Bob Dylan 
as a favorite. But say I happen to already know Seeger's work and can't 
stand him, so I tell it to forget Seeger (and thus Seeger-likes). It's now 
smarter. I can further locate my space with more precision by rating as 
many albums as I wish, indicating my love or hate of them. (A strong 
negative rating is just as useful as a strong positive rating.) Because it 
is the web, I also have the option of listening to music selections to re- 

fresh my memory or evaluate recommended candidates. 

The real power of this system lies not in mere recommendation, 
but in its ability to create relationships among its 3 million registered 
users. It allows members to link up with their taste-neighbors. All the 
fans of ambient music, or early Seattle grunge, are encouraged to strike 
up conversations in "venues," or start mail lists, or simply introduce 
themselves. Out of this technology is born yet another relationship: 

Most listeners don't have easily classifiable tastes. They're fans of 
Nirvana, U2, The Beatles, Joni Mitchell, and Nine Inch Nails. They'll 
have neighbors in an obscure unnamed space — the Beatles/U2/Nin- 
elnchNails space. Through Firefly, these folks can identify their tastes 
by the microcommunity of like-minded folks they create for themselves. 
What Firefly can do with music, it can also do with books. And mov- 
ies. And web pages. (Firefly recently spun each of these domains out to 

People who share small 


preferences for particular 
books or movies in a single 
"taste space" can use their 
collaborative sorting to aid 
them in future purchases. 

Peers in Tastespace 

> * 

Relationship Tech / 127 

separate partners.) They are rated in the same way, with equally useful 
results. But now the combined media space is tremendously potent. 
Weird subcultures can be detected long before they have a name. Read- 
ers of Anne Rice vampire novels who like country and western music 
and Woody Allen movies suddenly realize they are a group! Self-recog- 
nition is the first step toward influence. 

Online booksellers such as and Barnes and Noble are 
using similar R-technology to sell more books, and to make customers 
smarter shoppers. Amazon derives its collaborative recommendations 
from customers who have a purchasing behavior similarto yours. Based 
on what you have bought in the past, and what others have bought in 
the past, Amazon advises: Dear reader, you should like these titles. And, 
they are usually right. In fact, their recommendations are so handy that 
they are Amazon's prime marketing mechanism and their chief source 
of revenue growth. According to company spokespersons, "significant" 
numbers of users buy additional books — on impulse — because of the 
co-recommendations that pop up when you inspect a book. 

Evan Schwartz, author of Webonomics, goes so far as to suggest that 
firms such as Amazon should be viewed as primarily selling intangible 
relationships. "Amazon should not be compared to actual stores sell- 
ing books. Rather . . . the value that Amazon adds is in the reviews, the 
recommendations, the advice, the information about new and upcom- 
ing releases, the user interface, the community interest around certain 
subjects. Yes, Amazon will arrange to deliver the book to your door, but 
you as a customer are really paying them for the information that led 
to your purchase." When you log on to Amazon you get a relationship 
generator, one that increasingly knows you better. 

The beauty of network logic is that the mechanics of this software 
does not rely on artificial intelligence, or Al. Rather the collaborative 
work is done by pooling the teaching that each person would do alone 
into one distributed base. It's an example of dumb power. Lots of people 
teaching a dumb program, but all connected together, producing use- 
ful intelligence. The strength of the network is built by the slim bits of 
information that each member is willing to share. Sometimes that's all 
it takes. 

The web is a hotbed of innovations in R-tech. If you had success in 
a search and are willing for that information to be spread collectively 

128 / New Rules for the New Economy 

to others, this lateral relationship can improve the search function for 
everyone. Sometimes called "collaborative filtering" these kinds of so- 
cial network functions will spread widely within the web itself, as well as 
within companies and small work groups. 

As in other technological evolutions, relationship tech will begin its 
innovation in the avant garde, then work back to the familiar. 

R-tech first appears in the world of the web, but will gradually infil- 
trate the world of canned goods and sports equipment, as well as TV 
shows and vacation spots. Eventually it reaches the final stage in the 
progression of customer relations: 

■ To change what a customer wants. The ongoing tango between cus- 
tomer and provider draws them together until their identities disappear 
at times. This is especially true in frontier arenas, where expertise is usu- 
ally in short supply. At first this is no authority on what customers want 
or what providers should deliver — as in these early days of the web and 
e-commerce. Expertise has to be developed jointly, coevolved. Custom- 
ers must be trained and educated by the company to teach them what 
they need, and then the company is trained and educated by the cus- 
tomers. We saw precisely this equation in the pioneer days of online 
conferencing about a decade ago. When email and chat began, no one 
knew the difference between great email and okay email, between fab- 
ulous chat areas and average chat areas. The best online companies 
learned all they knew from their first customers. But the customers, 
too, had little expertise of what to expect and so relied on the visions 
and vaporware suggested by the companies. Customer and company 
educated each other on what was possible. 

Good products and services are cocreated: The desires of customers 
grow out of what is possible, and what is possible is made real by com- 
panies following new customer desires. Because creation in a network 
is a cocreation, a prosumptive act, a multifaceted relationship must ex- 
ist between the cocreators. 

Cocreation and prosumption require an information peerage. Infor- 
mation must flow symmetrically to all nodes. In the industrial society, 
the balance of information inevitably sided with corporations. They had 

Relationship Tech / 129 

centralized knowledge while the customer had only their own solo expe- 
rience divorced from that of all but a few friends. The coming network 
economy has changed that. Each new layer of complexity and technol- 
ogy shifts the action toward the individual. 

The intent of networked technology is to make the customer smarter. 
This may require sharing previously proprietary knowledge with the 
customer. It may also be as simple as sharing what the company knows 
about the customer with the customer herself. 

R-tech tries to rebalance the traditional asymmetrical flow of infor- 
mation, so that the customer learns as fast as the firm (and so the firm 
learns as fast as the customer). At first the idea of focusing on "learning 
customers" instead of the "learning company" seems misplaced. But it 
is part of the larger shift away from a view of the firm as a standalone 
unit and toward a view of the firm as an interacting node in a much 
larger network — a diffuse node made up of customers as well as em- 

Letting the customer learn with help from the firm is not the only 
way to make the customer smarter. The other way is to reverse the usual 
flow of information in the market. John Hagel, co-author of Net Gain, 
says, "Instead of helping your firm capture as much information about 
the customer as you can, you want the customer to capture as much 
information about themselves as they can." And you want customers to 
capture as much information about the firms they are dealing with as 
well. There are several ways on the web to bias information toward the 
customer. Among the most exciting innovations are new vendors that 
send a bot around to comparison shop for you. If thirty music retailers 
online offer the soundtrack to the movie Titanic for sale, web sites such 
as Junglee or Jango will collect the offers from each vendor, and rank 
them for you. But the vendors are calling the shots; they craft the offer, 
keep the data of requests, and drive the sale. 

By reversing the direction of information flow one can create a "re- 
verse market." In a reverse market (already set by a few web sites), the 
customer dictates the terms of sale. You say, "I'd like to buy a Titanic 
CD for $10, new." You broadcast your offer into the web, and then the 
vendors come to you. This works best at first for high-ticket items such 
as cars, insurance, and mortgages. "I'd like a $120,000 thirty-year mort- 
gage for my house in San Jose. I can pay $1,000 per month. Do I have any 

130 / New Rules for the New Economy 

takers?" You set the terms, keep the data, and drive the transaction. 
Technology, of course, means that much of this negotiation happens in 
the background via agents and so forth; you don't have to do the hag- 
gling yourself. But the R-shift moves the capture of information into the 
hands of customers from those of the vendors. It makes the customer 

And whoever has the smartest customers wins. 

The third way to make the customer smarter is by connecting cus- 
tomers into a collective intelligence. 

When personal computers first entered the marketplace in the mid 
1970s, user groups sprung up everywhere to assist the perplexed. Any- 
one could attend a monthly meeting and swap useful tips about how 
to set up a printer, or get an upgrade program to work. It was all infor- 
mal, and free, and democratic; those who knew, told; those who didn't 
know, asked questions and took notes. Each specific computer platform 
spawned local user groups in major cities. There were user groups for 
"orphan" equipment such as Amigas, and video game consoles, and of 
course for Macs and DOS-based PCs. Some user groups grew to have 
tens of thousands of members and some ran their own free software 

Firms that encourage 
customers to talk to each other, 
to form affinity groups and 
hobby tribes, will breed smarter 
and more loyal customers while 
creating smarter products and 

emporiums and had budgets in the millions of dollars. 

User groups were seen by the outside world as evidence of the lousy 
state of the computer industry. Manuals were horrible, interfaces un- 
friendly. Critics complained that you didn't need to join a user group 
to get your TV up and running, or to turn your dishwasher on. Yet for 

Relationship Tech / 131 

many computer wanna-bes, the shared knowledge of a user group was 
essential in starting the journey into computerdom, or later onto the 
net and the web. 

In reality, user groups were not a sign of failure but a sign of intelli- 
gence. They were a means of making the consumer smarter. Some com- 
puter companies caught on to this reality early and made regular visits 
to the bigger user groups to answer questions and hear complaints and 
pick up suggestions. The user group, although independent and non- 
profit, became part of the computer companies' extended self. 

Today there are still some 2,000 Mac and PC user groups that offer 
regular meetings in the United States (and an equal number internation- 
ally). The Berkeley Mac User Group still boasts 10,000 members, and 
weekly meetings. Yet most user group action has shifted to the online 
space. Web sites with attendant conversation areas, FAQ (Frequently 
Asked Questions) archives, mail lists, and public bulletin boards all 
keep the distributed exchange of knowledge going. 

A user group is a peerage of responsibility. Group members take edu- 
cation into their own hands, and distribute the job of keeping up among 
themselves. It's long been appreciated that the best and most useful 
working knowledge about technical gear comes out of user groups. User 
groups are now a regular feature for avocations such as scuba diving, 
bicycling, saltwater aquariums, hot-rod cars, or any hobby where techno- 
logical change seems to outrun understanding. 

The most fanatical of user groups can be thought of as "hobby 
tribes," a phrase coined by science fiction writer David Brin. Hobby 
tribes are very informed, very connected, very smart customers. They 
band their enthusiasms together and become the experts. In some 
smaller niches they become the market, too. 

Expertise now resides in fanatical customers. The world's best ex- 
perts on your product or service don't work for your company. They are 
your customers, or a hobby tribe. 

Companies need user groups almost as much as users need them. 
User groups are better than advertising when customers are happy, and 
worse than cancer when they are not. Used properly, aficionados can 
make or break products. 

132 / New Rules for the New Economy 

The network economy has the potential to enable a civilization of 
aficionados. As customers get smarter, the locus of expertise shifts to- 
ward affiliates and home-brew groups, and away from large corpora- 
tions or the solo academic professional. If you really want to know what 
works, or where to find it, ask a hobby tribe. And not just in the realm 
of high-tech knowledge. All knowledge is pooling into aficionados. Be- 
cause of shared obsessions among horse lovers, there are more horse- 
shoers working today than a hundred years ago, in the age of cowboys. 
There are more blacksmiths making swords and chain mail armor this 
year than ever worked in the medieval past. A network of aficionados is 
already here. 

The net tends to dismantle authority and shift its allegiance to peer 
groups. The cultural life in a network economy will not emanate from 
academia, or the cubicle of corporations, or even primetime media. 
Rather, it will reside in the small communities of interest known as 
fans, and 'zines, and subcultures. In Future Shock Alvin Toffler sets the 
stage: "Like a bullet smashing into a pane of glass, industrialism shat- 
ters societies, splitting them up into thousands of specialized agencies 
. . . each subdivided into smaller and still more specialized subunits. A 
host of subcults spring up; rodeo riders, Black Muslims, motorcyclists, 
skinheads, and all the rest." That initial shatter is now several thou- 
sands of subcultures. For every obsession in the world, there is now a 
web site. What industrialization began by shattering, the network econ- 
omy completes by weaving together and serving with great attention. 
The web of broken shards is now the big picture. 

Information shifts toward the peerage of customers, so does respon- 
sibility for success. The net demands wiser customers. 

The advent of relationship technologies on the net creates a larger 
role for the customer, and it puts more demands on the consumer, too. 
None of this enlargement of relationships can happen unless there are 
vast amounts of trust all around. "The new economy begins with tech- 
nology and ends with trust," says Alan Weber, founder of the new econ- 
omy business magazine Fast Company. 

If you send all your workers home to telecommute, you'll need a 
whopping lot of trust between you and your workers for that relocation 

Relationship Tech / 133 

to succeed. If I tell Firefly all the books I read, all the movies I watch, 
and all the web sites I visit, I will require a high degree of trust from 
them. If Compaq lets me delve into its expensively compiled knowledge 
database of known bugs and problems with certain computer parts, it 
has to trust me. 

Trust is a peculiar quality. It can't be bought. It can't be downloaded. 
It can't be instant — a startling fact in an instant culture. It can only ac- 
cumulate very slowly, over multiple iterations. But it can disappear in a 
blink. Alan Weber compares its accretion to a conversation: "The most 
important work in the new economy is creating conversations. Good 
conversations are about identity. They reveal who we are to others. And 
for that reason, they depend on bedrock human qualities: authenticity, 
character, integrity. In the end, conversation comes down to trust." 

A conversation is a pretty good model for understanding what is go- 
ing on in the network economy. Some conversations are short, abrupt ex- 
changes of minimal data; some are antagonistic, some are periodic, some 
are continuous, some are long-distance, some are face to face. A back- 
and-forth exchange starts between two people, and then spills over to 
several people, and as the conversation becomes multipronged and 
divergent, it gathers in more and more players. Eventually there are 
conversations between firms and objects as well as people, as more 
of the world's inanimate artifacts become connected. Increased anima- 
tion increases the number or times of interaction, and the frequency 
of conversation. The more interactions, the more important learning 
becomes, the more essential relationships become, the more trust be- 
comes a factor. Trust becomes what Weber calls "a business impera- 

But for all the talk of the importance of trust, it only comes at a 
price. It comes slow and it always comes awkwardly. "Trust can be 
messy, painful, difficult to achieve, and easy to violate," writes Weber. 
"Trust is tough because it is always linked to vulnerability, conflict, and 
ambiguity. For managers steeped in rationalism, hierarchies, rule-based 
decision making, and authority based on titles, this triad of vulnerabil- 
ity, conflict, and ambiguity threatens a loss of control." 

The technologies of relationships will not ease this fear or pain. They 
can strengthen and diversify relationships and trust, but not make them 
automatic, easy, or instant. At the forefront in the chore to cultivate 

134 / New Rules for the New Economy 

trust — as a business imperative — stands the rugged hurdle of privacy. 
No other issue summarizes the unique opportunities and challenges of 
the network economy as much as privacy does. 

Privacy concerns were once exclusively aimed at Big Brother govern- 
ment, but net residents quickly realized that commercial entities — the 
little brothers on the net — were more worrisome. James Gleick, a tech- 
nology correspondent for the New York Times put it this way: "Whatever 
the Government may know about us, it seems that the network itself — 
that ever-growing complex of connections and computers — will know 
more. And no matter how much we bristle at the idea, we nevertheless 
seem to want services that the network can provide only if it knows." 

An entire book could be written about the fundamental conversation 
between what we want to know about others and what we want others 
and the net itself to know about us. But I will make only a single point 
about privacy in space of an emerging new economy: 

Privacy is a type of conversation. Firms should view privacy not as 
some inconvenient obsession of customers that must be snuck around 
but more as a way to cultivate a genuine relationship. 

The standard rejoinder by firms to objections from customers for 
more personal information is, "The more you tell us, the better we can 
serve you." This is true, but not sufficient. An individual can't comfort- 
ably divulge unless there is trust. 

Take the trust many people feel in a small town. The interesting 
thing about a small town is that the old lady who lived across the street 
from you knew every move you made. She knew who came to visit you 
and what time they left. From your routine she knew where you went, 
and why you were late. Two things kept this knowledge from being of- 
fensive: 1) When you were out, she kept an eye on your place, and 2) 
you knew everything about her. You knew who came to visit her and 
where she went (and while she was gone you kept an eye on her place). 
More important, you knew that she knew. You were aware that she kept 
an eye on you, and she knew that you watched her. There was a sym- 
metry to your joint knowledge. There was a type of understanding, of 
agreement. She wasn't going to rifle through your mailbox, and neither 
would you peek in hers, but if you had a party and someone passed out 

Relationship Tech / 135 

on the porch, you could count on the neighborhood knowing about it 
the next day. And vice versa. The watchers are watched. 

One of chief chores in the network economy is to restore the sym- 
metry of knowledge. 

For trust to bloom, customers need to know who knows about them, 
and the full details of what they know. They have to have knowledge 
about the knower equal to what the knower knows about them. I would 
be a lot more comfortable with what the credit companies knew about 
me if I knew with great accuracy what they knew about me, how they 
know it, and who else they told. And I'd be even more at ease if I de- 
rived some compensation for the value they get for knowing about me. 

Personally, I'm happy for anyone to track all my activities 24 hours a 
day, as long as I have a full account of where that information goes and 
I get paid for it. If I know who the watchers are, and they establish a re- 
lationship with me (in cash, discounts, useful information, or superior 
service, or otherwise), then that symmetry becomes an asset to me and 
to them. 

We see the first inklings of this trust machinery in protocols such as 
Truste. Truste was founded in 1995 as a nonprofit consortium of web 
sites and privacy advocates to enhance privacy relationships in the on- 
line marketspace. They have developed an information standard also 
called Truste. The first stage is a system of simple badges posted on 
the front pages of web sites. These seals alert visitors — before they en- 
ter — of the site's privacy policies. The badges declare that either: 

■We keep no records of anyone's visit. Or, 

■We keep records but only use them ourselves. We know who you 
are so that when you return we can who show you what's new, or tailor 
content to your desires, or make purchase transactions easier and simpli- 
fied. Or, 

■ We keep records, which we use ourselves, but we also share knowl- 
edge with like-minded firms that you may also like. 

Those three broad approaches encompass most transactions; but 
there are as many subvariations as there are sites. (To post the badges 

136 / New Rules for the New Economy 

or seal, sites must submit to an audit by Truste, which guarantees to the 
public that a site does adhere to the policies they post.) But the seals 
are only labels. The real work happens behind the scenes by means of 
very sophisticated R-tech. 

Here is a hypothetical scenario of a visit to a Truste-approved com- 
merce site a couple of years hence. I visit the Gap clothing store online. 
They notify me that they are a level 2 site; they remember who I am, my 
clothes size, and what I bought or even inspected last time I visited — 
but they don't sell that data. In exchange for information about myself, 
they offer me a 10% discount. Fine with me! Makes life easier. I visit 
the site of Raven Maps, the best topographical maps in the world. They 
let me know that my visit with them is on a level 3 basis — they trade 
my name and interests, but nothing else, with other travel-related sites, 
which they conveniently list. In exchange they will throw in one free map 
per purchase. Since the friends of Raven Map look very intriguing, I say 
yes. I visit CompUSA. They want to know everything about me, and they 
will sell everything about me, level 3. In exchange, they will lease me 
a multimedia computer with all the bells and whistles for free. Okay? 
Ummm, maybe. Then I visit ABC, the streaming video TV place. They 
declare that they keep no records whatsoever. Whatever shows I watch, 
only I know. They keep aggregate knowledge, which they use to lure ad- 
vertisers, but not specifics. A lot of people are attracted to this level 1 
total nonsurvelliance, despite the heavy dose of commercials, and keep 
coming back. 

At the end of the month I get a privacy statement, similar in format 
to a credit card statement. It lists all the deals and relationships I have 
agreed to that month and what I can expect. It says I agreed to give the 
Gap particular personal information, but that information should go no 
further than them. I gave a pretty detailed personal profile to Raven and 
the three companies they gave it to show up on my statement. Those 
three have a one-time use of my data. Raven owes me a map. In the end 
I gave CompUSA my entire profile. I am owed a computer. The nine ven- 
dors they sold my info to also show up; they have unlimited use of my 
profile and CompUSA web site activities. I'll get junk mail from those 
nine for a while — but my new computer will be able to filter it all out! In 
addition, I made a deal with the New York Times which lets them keep 
my reading activities, but nothing else, for a free month's subscription. 

Relationship Tech / 137 

Also, my statement shows that American Airlines got my address from 
ABC, when they claimed level 1. I'll have to have my privacy bot contact 
them and sort that "mistake" out. 

Caller ID, unlisted phone numbers, unlisted email address, indi- 
vidual-free aggregates, personally encrypted medical records, passport 
profiles, temporary pseudonym badges, digital signatures, biometric 
passwords, and so on. These are all the technologies we'll be using to 
sort out the messy business of creating relationships and trust in a net- 
work economy. 

If only we knew precisely what relationships were. Industrial produc- 
tivity was easy to measure. One could ascertain a clear numerical an- 
swer. Relationships, on the other hand, are indefinite, fuzzy, imprecise, 
complex, innumerate, slippery, multifaceted. Much like the net itself. 

As we create technologies of relationships we keep running into the 
soft notions of reputation, privacy, loyalty, and trust. Unlike bit or baud, 
there's no good definition of what these concepts mean exactly, though 
we have some general ideas. Yet we are busy engineering a network 
world to transmit and amplify reputations and loyalty and trust. The 
hottest, hippest frontiers on the net today are the places where these 
technologies are being developed. 

The network economy is founded on technology, but can only be 
built on relationships. It starts with chips and ends with trust. 

Ultimately the worth of a technology is judged by how well it fa- 
cilitates an increase in relational activity. VR pioneer Jaron Lanier has 
proposed the Connection Test: Does a technology in question connect 
people together? By his evaluation telephones are good technology, 
while TV is not. Birth control pills are, while nuclear power is not. 

By this measure, network technology is a great deal. It has the po- 
tential to link together all kinds of sentient beings in every imaginable 
way, and more. The imperative of the network economy is to maximize 
the unique needs and talents of individual beings by means of their re- 
lationships with many others. 

That means not being connected at times. Silence is often an appro- 
priate response in a conversation. Privacy is often advantageous in a net- 
worked world. The dimensions of relationship extend into not knowing as 

138 / New Rules for the New Economy 

well as into the known. It is one of many mysteries in the human condi- 
tion that will be wired into the technologies of the network economy. 


Make customers as smart as you are. For every effort a firm makes in 
educating itself about the customer, it should expend an equal effort in 
educating the customer. It's a tough job being a consumer these days. 
Any help will be rewarded by loyalty. If you don't educate your customer, 
someone else will — most likely someone not even a competitor. Almost 
any technology that is used to market to customers, such as data min- 
ing, or one-to-one techniques, can be flipped around to provide intel- 
ligence to the customer. No one is eager for a core dump, but if you can 
remember my trouser size, or suggest a movie that all my friends loved, 
or sort out my insurance needs, then you are making me smarter. The 
rule is simple: Whoever has the smartest customers wins. 

Connect customers to customers. Nothing is as scary to many cor- 
porations as the idea of sponsoring dens in which customers can talk 
to one another. Especially if it is an effective place of communication. 
Like the web. "You mean," they ask in wonder, "we should pay a mil- 
lion dollars to develop a web site where customers can swap rumors 
and make a lot of noise? Where complaints will get passed around and 
the flames of discontent fanned?" Yes, that's right. Often that's what 
will happen. "Why should we pay our customers to harass us," they 
ask, "when they will do that on their own?" Because there is no more 
powerful force in the network economy than a league of connected cus- 
tomers. They will teach you faster than you could learn any other way. 
They will be your smartest customers, and, to repeat, whoever has the 
smartest customers wins. 

Just recently E-trade, the pioneering online stock broker, took the 
bold step of setting up an online chat area for its customers. We'll see 
more smart companies do this. Whatever tools you develop that will aid 
the creation of relationships between your customers will strengthen the 
relationship of your customers to you. This effort can also be thought of 
as Feeding the Web First. 

All things being equal, choose technology that connects. Technol- 

Relationship Tech / 139 

ogy tradeoffs are made daily. A device or method cannot be the fastest, 
cheapest, more reliable, most universal, and smallest all at once. To 
excel, a tech has to favor some dimensions over others. Now add to 
that list, most connected. This aspect of technology has increasing im- 
portance, at times overshadowing such standbys as speed and price. If 
you are in doubt about what technology to purchase, get the stuff that 
will connect the most widely, the most often, and in the most ways. 
Avoid anything that resembles an island, no matter how well endowed 
that island is. 

Imagine your customers as employees. It is not a cheap trick to get 
the customer to do what employees used to do. It's a way to make a 
better world! I believe that everyone would make their own automobile 
if it was easy and painless. It's not. But customers at least want to be in- 
volved at some level in the creation of what they use — particularly com- 
plex things they use often. They can superficially be involved by visiting 
a factory and watching their car being made. Or they can conveniently 
order a customized list of options. Or, through network technology, 
they can be brought into the process at various points. Perhaps they 
send the car through the line, much as one follows a package through 
FedEx. Smart companies have finally figured out that the most accurate 
way to get customer information, such as a simple address, without er- 
ror, is to have the customer type it themselves right from the first. The 
trick will be finding where the limits of involvement are. Customers are 
a lot harder to get rid of than employees! Managing intimate customers 
requires more grace and skill than managing staff. But these extended 
relationships are more powerful as well. 

The final destiny for the future of the company often seems to be the 
"virtual corporation" — the corporation as a small nexus with essential 
functions outsourced to subcontractors. But there is an alternative vi- 
sion of an ultimate destination — the company that is only staffed by cus- 
tomers. No firm will ever reach that extreme, but the trajectory that leads 
in that direction is the right one, and any step taken to shift the balance 
toward relying on the relationships with customers will prove to be an 


Don't Solve Problems; 
Seek Opportunities 

Until Charles Darwin's discovery of evolution, life was surveyed in the 
present tense. Animals were probed to see how their innards worked, 
plants dissected for useful magical potions, the creatures of the sea 
investigated for their strange lifestyles. Biology was about how living 
organisms thrived day to day. 

Darwin forever transformed our understanding of life by insisting 
that life didn't make sense without the framework of its billion-year evo- 
lution. Darwin proved that even if all we wanted to know was how to 
cure dysentery in pigs, or how best to fertilize corn, or where to look for 
lobsters, we had to keep in mind the slow, but commanding dynamics 
of life's evolution over the very long term. 

Until recently, economics was about how businesses thrived year to 
year, and what kind of governmental policy to institute in the next quar- 
ter. The dynamics of long-term growth are quite remote from the issues 
of whether the money supply should be tightened this year. The study 
of economics has no Darwin yet, but it is increasingly clear that the be- 
havior of everyday markets cannot be truly understood without keeping 
in mind the slow, but commanding dynamics of long-term economic 

Over the long run, the world's economy has grown, on average, a 
fractional percent per year. During the last couple of centuries it aver- 
aged about 1% per year, reaching about 2% annually this century, when 
the bulk of what we see on earth today was built. That means that each 
year, on average, the economic system produces 2% more stuff than 
was produced in the previous 12 months. Beneath the frantic ups and 

Opportunities Before Efficiencies / 141 

downs of daily commerce, a persistent, invisible swell pushes the entire 
econosphere forward, slowly thickening the surface of the earth with 
more things, more interactions, and more opportunities. And that tide 
is accelerating, expanding a little faster each year. 

At the genesis of civilization, the earth was mostly Darwin's realm — 
all biosphere, no economy. Today the econosphere is huge beyond com- 
prehension. If we add up the total replacement costs of all the roads in 
every country in the world, all the railways, vehicles, telephone lines, 
power plants, schools, houses, airports, bridges, shopping centers (and 
everything inside them), factories, docks, harbors — if we add up all the 
gizmos and things humans have made all over the planet, and calculate 
how much it is all worth, as it if were owned by a company, we come up 
with a huge amount of wealth accumulated over centuries by this slow 
growth. In 1998 dollars, the global infrastructure is worth approximately 
4 quadrillion dollars. That's a 4 with 15 zeros. That's a lot of pennies 
from nothing. 

What is the origin of this wealth? Ten thousand years ago there was 
almost none. Now there is 4 quadrillion dollars worth. Where did all 
of it come from? And how? The expenditure of energy needed to cre- 
ate this fluorescence is not sufficient to explain it since animals expend 
vast quantities of energy without the same result. Something else is at 
work. "Humans on average build a bit more than they destroy, and cre- 
ate a bit more than they use up," writes economist Julian Simon. That's 
about right, but what enables humans, on average, to ratchet up such 
significant accumulations? 

The ratchet is the Great Asymmetry, says evolutionist Steven Jay 
Gould. This is the remarkable ability of evolution to create a bit more, on 
average, than it destroys. Against the great drain of entropy, life ratchets 
up irreversible gains. The Great Asymmetry is rooted in webs, in tightly 
interlinked entities, in self-reinforcing feedback, in coevolution, and in 
the many loops of increasing returns that fill an ecosystem. Because 
every new species in life cocreates a niche for yet other new species to 
occupy, because every additional organism presents a chance for other 
organisms to live upon it, the cumulative total multiplies up faster than 
the inputs add up; thus the perennial one-way surplus of opportuni- 

We call the Great Asymmetry in human affairs "the economy." It too 

142 / New Rules for the New Economy 

is packed with networks of webs that multiply outputs faster than inputs. 
Therefore, on average, it fills up faster than it leaks. Over the long run, 
this slight bias in favor of creation can yield a world worth 4 quadrillion 

It is not money the Great Asymmetry accrues, nor energy, nor stuff. 
The origin of economic wealth begins in opportunities. 

The first object made by human hands opened an opportunity for 
someone else to imagine alternative uses or alternative designs for that 
object. If those new designs or variations were manifested, then these 
objects would create further opportunities for new uses and designs. 
One actualized artifact yielded two or more opportunities for improve- 
ment. Two improvements yielded two new opportunities each — now 
there were four possibilities. Four yielded eight. Thus over time the 
number of opportunities were compounded. Like the doubling of the 

Both life and wealth expand by 
compounding increase, which 
gives them an eternal slight 
advantage over death and 
loss, so that over time there is 
constant growth. 

lily leaf, one tiny bloom can expand to cover the earth in relatively few 

Perhaps the most potent physical force on earth is the power of com- 
pounded results, whether that is compounded interest, compounded 
growth, compounded life, or compounded opportunities. The inputs of 
energy and human time into the economy can only be supplied in an 
additive function, bit by bit, but over time the output is multiplied to 
compound upon itself, yielding astounding accumulations. 

A steady stream of human attention and thought is applied to in- 
venting new tools, devising new amusements, and creating new wants. 

Opportunities Before Efficiencies / 143 

But no matter how small and inconsequential, each innovation is a 
platform for yet other innovations to launch from. 

It is this expanding space of opportunities that creates an ongoing 
economy. It is this boundless open-ended arena for innovations that 
spurs wealth creation. Like a chain reaction, one well-placed innovation 
can trigger dozens, if not hundreds, of innovation offspring down the 

Consider, for example, email. Email is a recent invention that has 
ignited a frenzy of innovation and opportunity. Each tiny bit of email 
ingenuity begets several other bits of ingenuity, and they each in turn 
beget others, and so on compoundfinitum. Unlike a piece of junk mail, 
an email advertisement costs exactly the same to send to one per- 
son or one million people — assuming you have a million addresses. 
Where does one get a million addresses? People innocently post their 
addresses all over the net — at the bottom of their home page, or in a 
posting on a news group, or in a link off an article. These postings sug- 
gested an open opportunity to programmers. One of them came up 
with the idea of a scavenger bot. (A bot, short for robot, is a small bit of 
code.) A scavenger bot roams the net looking for any phrase contain- 
ing the email @ sign, assumes it is an address, pockets it, and then 
compiles lists of these addresses that are sold for $20 per thousand 
to spammers — the folks who mail unsolicited ads (junk mail) to huge 
numbers of recipients. 

The birth of scavenger bots suddenly created niches for anti-spam 
bots. Companies that sell internet access seed the net with decoy phony 
email addresses so that when the addresses are picked up by scavenger 
bots and used by the spammers, the internet provider will get mail they 

Each new invention creates a 
space from which several more 
inventions can be created. 
And from each of those new 
innovations comes yet more 
spaces of opportunity. 

144 / New Rules for the New Economy 

can track to find out where the spam is coming from. Then the provider 
blocks the spam from that source for all their customers, which keeps 
everyone happy and loyal. 

Naturally, that innovation creates opportunity for yet more innova- 
tion. Creative spammers devised technology that allows them to fake 
their source address; they hijack someone else's legitimate address to 
mail spam from and then flee after using it. 

Every move generates two countermoves. Every innovation creates 
an opportunity for two other innovations to succeed by it. 

Every opportunity seized launches at least two new opportunities. 

The entire web is an opportunity dynamo. More than 320 million 
web pages have been created in the first five years of the web's exis- 
tence. Each day 1.5 million new pages of all types are added. The num- 
ber of web sites — now at 1 million — is doubling every 8 months. (Think 
lily pond!) A single opportunity seized in 1989 by a bored researcher 
began this entrepreneurial bloom. It is not the lily leaf that is expanding 
now, but the lily pond itself. 

The number of opportunities, like the number of ideas, are limitless. 
Both are created combinatorially in the way words are. You can com- 
bine and recombine the same 26 letters to write an infinite number of 
books. The more components you begin with, the faster the total pos- 
sible combinations ramp up to astronomical numbers. Paul Romer, an 
economist working on the nature of economic growth, points out that 
the number of possible arrangements of bits on a CD is about io'- ) '"' on . 
Each arrangement would be a unique piece of software or music. But 
this number is so huge there aren't enough atoms in the universe to 
physically make that many CDs, even subtracting all the duds that are 
just random noise. 

We can rearrange more than just bits. Think of the mineral iron ox- 
ide, suggests Romer. It's rust. More than 10,000 years ago our ances- 
tors used iron oxide as a pigment to make art on cave walls. Now, by 
rearranging those same atoms into a precisely thin iron oxide film on 
plastic we get a floppy disk, which can hold a reproduction of the same 
cave paintings, and all the possible permutations of it wrought by Pho- 
toshop. We have amplified the possibilities a millionfold. 

Opportunities Before Efficiencies / 145 

The power of combinatorial explosions — which is what you get with 
ideas and opportunities — means, says Romer, "There's essentially no 
scarcity to deal with." Because the more you use opportunities, the less 
scarce they get. 

Everything we know about the structure of the network economy 
suggests that it will bolster this efflorescence of opportunities, for the 
following reasons: 

■ Every opportunity inhabits a connection. As we connect up more 
and more of the world into nodes on a network, we make available bil- 
lions more components in the great combinatorial game. The number 
of possibilities explodes. 

■ Networks speed the transmission of opportunities seized and in- 
novations created, which are disseminated to all parts of the network 
and the planet, inviting more opportunities to build upon them. 

Technology is no panacea. It will never solve the ills or injustices of 
society. Technology can do only one thing for us — but it is an astonish- 
ing thing: Technology brings us an increase in opportunities. 

Long before Beethoven sat before a piano, someone with twice his 
musical talents was born into a world that lacked keyboards or orches- 
tras. We'll never hear his music because technology and knowledge had 
not yet uncovered those opportunities. Centuries later the fulfilled oppor- 
tunity of musical technology gave Beethoven the opportunity to be great. 
How fortunate we are that oil paints had been invented by the time Van 
Gogh was ready, or that George Lucas could use film and computers. 
Somewhere on Earth today are young geniuses waiting for a technology 
that will perfectly match their gifts. If we are lucky, they'll live long enough 
for our knowledge and technology to make the opportunity they need. 

Oil paint, keyboard, opera, pen — all these opportunities remain. But 
in addition we have added film, metal work, skyscrapers, hypertext, and 
holograms as but a few of the new opportunities for artistic expression. 
Each year we add more opportunities of every stripe. Ways to see. Meth- 
ods for thinking. Means of amusing. Paths to health. Routes to under- 

The Great Asymmetry of economic life ceaselessly amasses new 
opportunities while relinquishing few old ones. The one-way journey is 

146 / New Rules for the New Economy 

toward more and more possibilities, pointing in more and more direc- 
tions, opening more and more new territories. 

"A few decades from now there will be ten billion people on 
the planet, and sophisticated computers will be cheaper than transis- 
tor radios," writes science fiction writer David Brin in his manifesto 
The Transparent Society. "If this combination does not lead to war and 
chaos, then it will surely result in a world where countless men and 
women swarm the dataways in search of something special to do — 
some pursuit outside the normal range, to make each one feel just a 
little bit extraordinary. Through the internet, we may be seeing the start 
of a great exploration aimed outward in every conceivable direction of 
interest or curiosity. An expedition to the limits of what we are, and 
what we might become." 

As the transmission of knowledge accelerates, as more possibili- 
ties are manufactured, the unabated push of incremental growth also 
speeds up. In the long run, creating and seizing opportunities is what 
drives the economy. A better benchmark than productivity would be to 
measure the number of possibilities generated by a company or innova- 
tion and use the total to evaluate progress. 

In the short run, though, problems must be solved. Businesses are 
taught that they are in the business of solving problems. Put your finger 
on a customer's dissatisfaction, the MBAs say, and then deliver a solu- 
tion. This bit of hoary advice inspires business to seek out problems. 
Problems, however, are entities that don't work. They are usually situ- 
ations where the goal is clear but the execution falls short. As in, "We 
have a reliability problem," or "Customers complain about out late de- 
livery." In the words of Peter Drucker, "Don't solve problems." George 
Gilder distills the essence further: "When you are solving problems, you 
are feeding your failures, starving your successes, and achieving costly 
mediocrity. In a competitive global arena, costly mediocrity goes out of 

"Don't solve problems; pursue opportunities." 

Seeking opportunities is no longer wisdom relevant only to the long 
cycles of economic progress. As the economy speeds up, so that an 
"internet year" seems to pass in one month, the principles of long- 

Opportunities Before Efficiencies / 147 

term growth begin to govern the day-to-day economy. The dynamics of 
growth become the dynamics of short-term competitive advantage. 

In both the short and long term, our ability to solve social and eco- 
nomic problems will be limited primarily to our lack of imagination in 
seizing opportunities, rather than trying to optimize solutions. 

There is more to be gained by producing more opportunities than by 
optimizing existing ones. 

Optimization and efficiency die hard. In the past, better tools made 
our work more efficient. So economists reasonably expected that the 
coming information age would be awash in superior productivity. That's 
what better tools gave us in the past. But, surprisingly, the technology 
of computers and networks have not yet led to measurable increases in 

Increasing efficiency brought us our modern economy. By produc- 
ing more output per labor input, we had more goods at cheaper prices. 
That raised living standards. The productivity factor is so fundamental 
to economic growth that it became the central economic measurement 
tracked and perfected by governments. As economist Paul Krugman 
once said, "Productivity isn't everything, but in the long run it is almost 

Productivity, however, is exactly the wrong thing to care about in the 
new economy. 

To measure efficiency you need a uniform output. But uniform out- 
put is becoming rarer in an economy that emphasizes smaller produc- 
tion runs, total customization, personalized "feelgoods" and creative 
innovation. Less and less is uniform. 

And machines have taken over the uniform. They love tedious and 
measurable work. Constant upgrades enable them to churn out more 
per hour. So the only ones who should worry about their own productiv- 
ity are those made of ball bearings and rubber hoses. And, in fact, the 
one area of the current economy that does show a rise in productiv- 
ity has been the U.S. and Japanese manufacturing sectors, which have 
seen an approximately 3% to 5% annual increase throughout the 1980s 

148 / New Rules for the New Economy 

and into the 1990s. This is exactly where you want to find productivity. 
Each worker, by the supervising machinery and tools, produces more 
rivets, more batteries, more shoes, and more items per person-hour. 
Efficiencies are for robots. 

Opportunities, on the other hand, are for humans. Opportunities de- 
mand flexibility, exploration, guesswork, curiosity, and many other qualities 
humans excel at. By its recursive nature, a network breeds opportunities, 
and incidentally, jobs for humans. 

Where humans are most actively engaged with their imaginations, 
we don't see productivity gains — and why would we? Is a Hollywood 
movie company that produces longer movies per dollar more produc- 
tive than one that produces shorter movies? Yet an increasingly greater 
percentage of work takes place in the information, entertainment, and 
communication industries where the "volume" of output is somewhat 

The problem with trying to measure productivity is that it measures 
only how well people can do the wrong jobs. Any job that can be mea- 
sured for productivity probably should be eliminated from the list of 
jobs that people do. 

The task for each worker in the industrial age was to discover how 
to do his job better: that's productivity. Frederick Taylor revolutionized 
industry by using his scientific method to optimize mechanical work. 
But in the network economy, where machines do most of the inhumane 
work of manufacturing, the question for each worker is not "How do I 
do this job right?" but "What is the right job to do?" 

Answering this question is, of course, extremely hard to do. It's 
called an executive function. In the past, only the top 10% of the work- 
force was expected to make such decisions. Now, everyone, not just 
executives, must decide what is the right next thing to do. 

In the coming era, doing the exactly right next thing is far more fruit- 
ful than doing the same thing better. 

But how can one easily measure this vital sense of exploration and 
discovery? It will be invisible if you measure productivity. But in the ab- 

Opportunities Before Efficiencies / 149 

sence of alternative measures, productivity has become a bugaboo. It 
continues to obsess economists because there is little else they know 
how to measure consistently. 

As bureaucrats continue to measure productivity, they find no sub- 
stantial increase in recent decades. This despite $700 billion invested 
into computer technology worldwide each year. Millions of people and 
companies worldwide purchase computer technology because it in- 
creases the quality of their work, but in the aggregate there is no record 
of their benefits in the traditional measurements. This unexpected find- 
ing is called the productivity paradox. As Nobel laureate Robert Solow 
once quipped, "Computers can be found everywhere except in economic 

There is no doubt that many past purchases of computer systems 
were bungled, mismanaged, and squandered. Lastyear8,ooo mainframe 
computers — computers with the power of a Unix box and the price of a 
large building — were sold to customers imprisoned by legacy systems. 
IBM alone sold $5 billion worth of mainframes in 1997. Those billions 
don't help the efficiency ratings. The year 2000 fiasco is a world-scale 
screwup that also saps the payoff from information technology. But ac- 
cording to economic historian Paul David, it took the smokestack econ- 
omy 40 years to figure out how to reconfigure their factories to take 
advantage of the electric motor, invented in 1881; for the first decade 
of the changeover productivity actually decreased. David likes to quip 
that "In 1900 contemporaries might well have said that the electric dy- 
namos were to be seen 'everywhere but in the economic statistics.' " 
And the switch to electric motors was simple compared to the changes 
required by network technology. 

At this point we are still in just the third decade of the age of the 
microprocessor. Productivity will rebound. In a few years it will "sud- 
denly" show up in elevated percentages. But contrary to Krugman's 
assertion, in the long run productivity is almost nothing. Not because 
productivity increases won't happen; they will. But because, like the 
universal learning curve that brings costs plunging down, increased 
productivity is a rote process. 

The learning curve of inverted prices was first observed by T. P. 
Wright, a legendary engineer who built airplanes after the First World 
War. Wright kept records of the numbers of hours it took to assemble 

150 / New Rules for the New Economy 

each plane and calculated that the time dropped as the total number of 
units completed increased. The more experience assemblers had, the 
greater their productivity. At first this was thought to be relevant only to 
airplanes, but in the 1970s engineers at Texas Instruments began apply- 
ing the rule to semiconductors. Since then the increase of productivity 
with experience is seen everywhere. According to Michael Rothschild, 
author of Bionomics, "Data proving learning-curve cost declines have 
been published for steel, soft contact lenses, life insurance policies, au- 
tomobiles, jet engine maintenance, bottle caps, refrigerators, gasoline 
refining, room air conditioners, TV picture tubes, aluminum, optical 
fibers, vacuum cleaners, motorcycles, steam turbine generators, ethyl 
alcohol, beer, facial tissues, transistors, disposable diapers, gas ranges, 
float glass, long distance telephone calls, knit fabric lawn mowers, air 
travel, crude oil production, typesetting, factory maintenance, and hy- 
droelectric power." 

As the law of increasing productivity per experience was seen to be 
universal, another key observation was made: The learning didn't have 
to take place within one company. The experience curve could be seen 
across whole industries. Easy, constant communication spreads experi- 
ence throughout a network, enabling everyone's production to contrib- 
ute to the learning. Rather than have five companies each producing 
10,000 units, network technologies allow the five to be virtually grouped 
so that in effect there is one company producing 50,000 units, and every- 
one shares the benefits of experience. Since there is a 20% drop in cost 
for every doubling of experience, this network effect adds up. Advances 
in network communications, standard protocols for the transmission 
of technical data, and the informal, ad hoc communities of technicians 
all spread this whirlwind of experience, and ensures the routine rise of 

Analyst Andrew Kessler of Velocity Capital Management compares 
the plummeting of prices due to the universal learning curve to a low 
pressure front in the economy. Just as a meterological low pressure sys- 
tem sucks in weather from the rest of the country, the low pressure 
point generated by sinking prices sucks in investments and entrepre- 
neurial zeal to create opportunities. 

Opportunities and productivity work hand in hand much like the 
two-step process of variation and death in natural selection. The pri- 

Opportunities Before Efficiencies / 151 

mary role that productivity plays in the network economy is to disperse 
technologies. A technical advance cannot leverage future opportunities 
if it is hoarded by a few. Increased productivity lowers the cost of acqui- 
sition of knowledge, techniques, or artifacts, allowing more people to 
have them. When transistors were expensive they were rare, and thus 
the opportunities built upon them were rare. As the productivity curve 
kicked in, transistors eventually became so cheap and omnipresent that 
anyone could explore their opportunities. When ball bearings were dear, 
opportunities sired by them were dear. As communication becomes 
everywhere dirt cheap and ubiquitous, the opportunities it kindles will 
likewise become unlimited. 

The network economy is destined to be a fount of routine produc- 
tivity. Technical experience can be shared quickly, increasing efficiencies 
in automation. The routine productivity of machines, however, is not 
what humans want. Instead, what the network economy demands from 
us is something that looks suspiciously like waste. 

Wasting time and inefficiencies are the way to discovery. When 
Conde Nast's editorial director Alexander Liberman was challenged on 
his inefficiencies in producing world-class magazines such The New 
Yorker, Vanity Fair, and Architectural Digest, he said it best: "I believe 
in waste. Waste is very important in creativity." Science fiction ace Wil- 
liam Gibson declared the web to be the world's largest waste of time. 
But this inefficiency was, Gibson further noted, its main attraction and 
blessing, too. It was the source of art, new models, new ideas, subcul- 
tures, and a lot more. In a network economy, innovations must first be 
seeded into the inefficiencies of gift economy to later sprout in efficien- 
cies of the commerce. 

Before the World Wide Web there was Dialog. Dialog was pretty fu- 
turistic. In the 1970s and '80s it was the closest thing to an electronic 
library there was, containing the world's scientific, scholarly, and jour- 
nalistic texts. The only problem was its price, $1 per minute. You could 
spend a lot of money looking things up. At those prices only serious 
questions were asked. There was no fooling around, no making frivo- 
lous queries — like looking up your name. Waste was discouraged. Since 
searching was sold as a scarcity, there was little way to master the me- 
dium, or to create anything novel. 

It takes 56 hours of wasting time on the web — clicking aimlessly 

152 / New Rules for the New Economy 

through dumb web sites, trying stuff, and making tons of mistakes and 
silly requests — before you master its search process. The web encour- 
ages inefficiency. It is all about creating opportunities and ignoring 
problems. Therefore it has hatched more originality in a few weeks than 
the efficiency-oriented Dialog system has in its lifetime, that is, if Dialog 
has ever hatched anything novel at all. 

The Web is being run by 20-year-olds because they can afford to 
waste the 56 hours it takes to become proficient explorers. While 45- 
year-old boomers can't take a vacation without thinking how they'll jus- 
tify the trip as being productive in some sense, the young can follow 
hunches and create seemingly mindless novelties on the web without 
worrying about whether they are being efficient. Out of these inefficient 
tinkerings will come the future. 

Faster than the economy can produce what we want, we are explor- 
ing in every direction, following every idle curiosity, and inventing more 
wants to satisfy. Like everything else in a network, our wants are com- 
pounding exponentially. 

Although at some fundamental level our wants connect to our 
psyches, and each desire can be traced to some primeval urge, technol- 
ogy creates ever new opportunities for those desires to find outlets and 
form. Some deep-rooted human desires found expression only when 
the right technology came along. Think of the ancient urge to fly, for 

KLM, the official Dutch airline, sells a million dollars worth of tickets 
per year to people who fly trips to nowhere. Customers board the plane 
on whatever international flight KLM has extra seats on, and make an 
immediate round-trip flight, returning without leaving the airport at the 
other end. The flight is like a high-tech cruise, where duty-free shopping 
and simply flying in a 737 at a steep discount is the attraction. Where 
did this want come from? It was created by technology. 

Finance writer Paul Pilzer notes perceptively that "When a merchant 
sells a consumer a new Sony Walkman for $50, he is in fact creating 
far more demand than he is satisfying — in this case a continuing and 
potentially unlimited need for tape cassettes and batteries." Technology 
creates our needs faster than it satisfies them. 

Needs are neither fixed nor absolute. Instead they are fluid and re- 
flexive. The father of virtual reality, Jaron Lanier, claims that his passion 

Opportunities Before Efficiencies / 153 

for inventing VR systems came from a long-frustrated urge to play "air 
guitar" — to be able to wave his arms and have music emanate from his 
motions. Anyone with access to a VR arcade can now have that urge 
satisfied, but it is a want that most people would have never recognized 
until they immersed themselves into virtual reality gear. It was certainly 
not a primary want that Plato would have listed. 

At one time a useful distinction was made in economics between 
"primary" needs such as food and clothing, and all other wants and 
preferences, which were termed "luxuries." Advertising is undoubtedly 
guilty, as critics charge, of creating desires. At first these manufactured 
desires were for luxuries. But the reach of technology is deep. Sophisti- 
cated media technology first creates desires for luxuries; then technol- 
ogy transforms those luxuries into primary necessities. 

A dry room with running water, electric lights, a color TV, and a toilet 
are considered so elementary and primary today that we outfit jail cells 
with this minimum technology. Yet three generations ago, this technol- 
ogy would have been officially classified as outright luxurious, if not friv- 
olous. In the government's eyes 93% of Americans officially classified 
as living in poverty have a color TV, and 60% have a VCR and a micro- 
wave. Poverty is not what it used to be. Technological knowledge con- 
stantly ups the ante. Most Americans today would find living without 
a refrigerator and telephone to be primitive, indeed. These items were 
luxuries only 60 years ago. At this point an automobile of one's own is 
considered a primary survival need of any adult. 

"Need" is a loaded word. The key point in economic terms is that 
each actualization of a desire — that is, new each service or product — 
forms a platform from which other possible activities can be imagined 
and desired. Once technology satisfies the opportunity to fly, for in- 
stance, flying produces new desires: to eat while flying, to fly by oneself 
to work each day, to fly faster than sound, to fly to the moon, to watch 
TV while flying. Once technology satisfies the desire to watch TV while 
flying, our insatiable imagination hungers to be able to watch a video of 
our own choosing, and to not see what others watch. That dream, too, 
can be actualized by technical knowledge. Each actualization of an idea 
supplies room for more technology, and each new technology supplies 
room for more ideas. They feed on each other, rounding faster and 

154 / New Rules for the New Economy 

This ever-extending loop whereby technology generates demand, 
and then supplies the technology to meet those demands is the origin 
of progress. But it is only now being viewed as such. In classical eco- 
nomics — based on the workings of the brick and smokestack — tech- 
nology was a leftover. To explain economic growth, economists tallied 
up the effects of the traditional economic ingredients such as labor, 
capital, and inventory. This aggregate became the equation of growth. 
Whatever growth was not explained by those was attributed to a resid- 
ual category: technology. Technology was thus defined as outside the 
economic engine. It was also assumed to be a fixed quantity — some- 
thing that didn't really change itself. Then in 1957 Robert Solow, an 
economist working at MIT, calculated that technology is responsible for 
about 80% of growth. 

We see now, particularly with the advent of the network economy, 
that technology is not the residual, but the dynamo. In the new order, 
technology is the Prime Mover. 

Our minds will at first be bound by old rules of economic growth 
and productivity. Listening to the technology can loose them. Technol- 
ogy says, rank opportunities before efficiencies. For any individual, or- 
ganization, or country the key decision is not how to raise productivity 
by doing the same better, but how to negotiate among the explosion of 
opportunities, and choose right things to do. 

The wonderful news about the network economy is that it plays right 
into human strengths. Repetition, sequels, copies, and automation all 
tend toward the free and efficient, while the innovative, original, and 
imaginative — none of which results in efficiency — soar in value. 


Why can't a machine do this? If there is pressure to increase the pro- 
ductivity of human workers, the serious question to ask is, why can't a 
machine do this? The fact that a task is routine enough to be measured 
suggests that it is routine enough to go to the robots. In my opinion, 
many of the jobs that are being fought over by unions today are jobs 
that will be outlawed within several generations as inhumane. 

Scout for upside surprises. The qualities needed to succeed in the 

Opportunities Before Efficiencies / 155 

network economy can be reduced to this: a facility for charging into the 
unknown. Disaster lurks everywhere, but so do unexpected bonanzas. 
But the Great Asymmetry ensures that the upside potential outweighs 
the downside, even though nine out often tries will fail. Upside benefits 
tend to cluster. When there are two, there will be more. A typical upside 
surprise is an innovation that satisfies three wants at once, and gener- 
ates five new ones, too. 

Maximize the opportunity cascade. One opportunity triggers an- 
other. And then another. That's a rifle-shot opportunity burst. But if one 
opportunity triggers ten others and those ten others after, it's an explo- 
sion that cascades wide and fast. Some seized opportunities burst com- 
pletely laterally, multiplying to the hundreds of thousands in the first 
generation — and then dry up immediately. Think of the pet rock. Sure, 
it sold in the millions, but then what? There was no opportunity cas- 
cade. The way to determine the likelihood of a cascade is to explore the 
question: How many other technologies or businesses can be started 
by others based on this opportunity? 

^Tj^^usand Points of 

The network economy will unleash opportunities on a scale never seen 
before on Earth. But the network economy is not Utopia. It is a unique 
phase of economic development much like adolescence — a thrilling, 
disorienting, and never-to-be repeated time. The planet can progress 
only once through the stage when it is first completely wrapped by net- 
works of thought and interaction. We are now at that moment when 
a cloak of glass fibers and a halo of satellites are closing themselves 
around the globe to bring forth a seamless economic culture. 

This new global economic culture is characterized by decentralized 
ownership and equity, by pools of knowledge instead of pools of capital, 
by an emphasis on an open society, and, most important, by a wide- 
spread reliance on economic values as the basis for making decisions 
in all walks of life. 

The sources of capital, which in the industrial age were once consol- 
idated in a few banks and individual "capitalists," are now fragmenting 
into millions of networked bank accounts, mutual funds, and private 
investments throughout society. Elite, centralized banks used to have 
a monopoly on capital — the engine of capitalism. Bankers loaned their 
assets as debt, and from this debt, industry rose. But with increased 
knowledge and communication, investors realized that partnerships — 
or investments where the investor shares risk — yield significantly more 
wealth in the long run. Technology has accelerated the migration from 
making loans to making investments. The ease of computerized ac- 
counting allows almost anyone with as little as $100 to plug into the 
network of equity. Despite the rise of a few gigantic global banks, in- 

A Thousand Points of Wealth / 157 

creasing amounts of the wealth are now held in equity, and not in debt. 
Today, for instance, 28% of U.S. household assets are kept in equities — 
more than is kept in banks — and 44% of U.S. households own stock. 

Networks promote this equity culture. The ownership of organi- 
zations is distributed and decentralized into a thousand points. The 
trans-actional costs of owning a tiny share of someone's else's dreams 
and ambitions continues to drop so that it becomes feasible to pos- 
sess, directly and indirectly, small parts of many companies. When you 
invest in a mutual fund, you invest in hundreds of thousands of other 
people's work. You use the wealth that your own ambition has gener- 
ated to seed the generation of prosperity by others. You may own only 
some minuscule portion of an enterprise, but you can easily own parts 
of many firms, and each firm is owned by millions of individuals. This is 
network equity. 

Out of this distributed ownership a portrait of a network emerges. 
Millions of lines of investment crisscross the landscape. Afew individu- 
als own a lot, but the majority of nodes are dispersed into small bank 
accounts in small towns. The bulk of stocks in the United States are 
controlled by the pension funds of ordinary citizens — by millions of indi- 
viduals in the aggregate. The workers of America really do collectively 
own the means of production. 

This network equity is made possible by the same network technol- 
ogy — shrinking chips and expanding communications — that creates 
wealth in the first place. The tracking, accounting, and transmission of 
each person's wealth and slivers of ownership can happen only because 
computation and telecommunication have reduced the cost of a trans- 
action to insignificance, Today there are 7,000 mutual funds — 7,000 
ways to divvy up the equity of wealth creation. And there are a similar 
number of publicly traded companies that have, in effect, divvied up 
their wealth to many owners. 

There are several trends in this emerging equity culture, each one 
amplified by pervasive network technology. 

First, the spread of ownership is becoming global, just as the econ- 
omy itself is. In the last few years, Europe has suddenly sent a mind-bog- 
gling infusion of money into the stock markets. Europeans discovered 
equity culture and overnight invested hundreds of billions of dollars 
of their old wealth into the network of ownership. At the same time, 

158 / New Rules for the New Economy 

hungry investors are pouring billions into the coffers of Asian and Latin 
American "emerging markets." Today, almost any investor in mutual 
funds, whether he knows it or not, has a stake in a company operating 
in a nation outside his own. 

Second, as the ease and price of transactions drop, the spread of 
ownership becomes fine-grained and ever wider. Smaller and smaller 
investments into more and more varieties of endeavors are possible. 
Several banks are following the lead of the Grameen Bank of Ban- 
gladesh and offering microloans. These loans amount to U.S. $100 
or less, and are made to third-worlders who use the money to buy a 
cow, purchase some yarn, or begin some other microentrepreneurial 
dream. The payback rate is around 95%, making these almost as risk- 
free as bonds. As one banking report says, "Lending to poor people in 
the shanty towns of La Paz may be safer for banks than lending to the 
government of Bolivia itself." Large commercial banks have noticed the 
U.S. $7 billion already lent to 13 million people around the world, and 
are bringing "microfinance" into the mainstream of banking. The low 
cost of tracking large numbers of fast-circulating payments means that 
network technology can accelerate the velocity of money in such decen- 
tralized, microfinance programs. It is easy to imagine a high-yielding 
mutual fund based on hundreds of thousand of up-and-coming third 
world microentrepreneurs. 

Third, the same type of fine-grained decentralization is about to 
happen in publicly traded companies. During the 1990s approximately 
4,000 companies "went public" in the United States. These corpora- 
tions were newly funded by the investment of many small shareholders, 
who collectively contributed about $250 billion to these companies' eq- 
uity. Right now, very old-fashioned hurdles prevent many smaller com- 
panies from accepting equity investments by the public. Some of these 
hurdles are legacies from the industrial era when communication and 
information were scarce. Some obstacles are simply the selfish protec- 
tions of investment bankers and others who reap billions by their mo- 
nopoly on controlling the process of taking a company public. Network 
technology is radically altering the stock market, causing a widespread 
reevaluation of the role and worth of stock brokers, traders, and a cen- 
tralized market itself (such as the New York Stock Exchange) in a world 

A Thousand Points of Wealth / 159 

where economic information is ubiquitious and instant. Secure, reli- 
able, and trustworthy offerings of publicly traded companies can hap- 
pen on the net without most of the traditional Wall Street rigmarole. 
Network technology will make it possible for qualified companies to 
take their company public from a desktop, directly soliciting the invest- 
ments from billions of individuals and organizations worldwide. This 
will happen sooner than Wall Street thinks. 

Fourth, the Silicon Valley model of compensation is infecting more 
parts of the world. A major element of equity culture is the ideology 
that every person working in a company should have the opportunity to 
own part of it. In most American high-tech companies, stock options 
for employees are mandatory. Shares in the company are often used to 
recruit hot talent, or to be dispensed as bonuses, or, in the case of start- 
ups, to be paid out as a substitute for a salary. Companies that grant 
stock options to all employees return greater wealth to shareholders 
than companies that don't (19% for the former, 11% for the latter). 

In the network economy, ownership is fragmented into myriad parts, 
sped along electronic pathways, and dispersed among workers, ven- 
ture capitalists, investors, alliance members, outsiders, and, in minute 
doses, even to competitors. Networks breed swarm capitalism. 

Yet as networks rise, the center recedes. It is no coincidence that 
global networks appear at the same time as the postmodern literary 
movement. In postmodernism, there is no central authority, no univer- 
sal dogma, no foundational ethic. The theme of postmodernism in the 
arts, science, and politics is summed up by Steven Best and Douglas 
Kellner in their book The Postmodern Turn: "The postmodern turn re- 
sults in fragmentation, instability, indeterminacy, and uncertainty." This 
also sums up the net. 

Network principles renounce rigidity, closed structure, universal 
schemes, central authority, and fixed values. Instead networks offer up 
plurality, differences, ambiguity, incompleteness, contingency, and mul- 
tiplicity. These qualities are ideal for disruption, for the spread of net- 
worked-organized crime, and for fostering the lack of shared values. 

Because the nature of the network economy seeds disequilibrium, 
fragmentation, uncertainty, churn, and relativism, the anchors of mean- 
ing and value are in short supply. We are simply unable to deal with 

160 / New Rules for the New Economy 

questions that cannot be answered by means of technology. The stereo- 
typical modern consumer is already a rather thin character. He or she is 
like a balloon: possessing an inflated ego and a thin identity stretched 
to its limit. They don't know who they are, but they are very certain that 
they are very important. The smallest prick can pop their container. 

In the great vacuum of meaning, in the silence of unspoken values, 
in the vacancy of something large to stand for, something bigger than 
oneself, technology — for better or worse — will shape our society. 

Because values and meaning are scarce today, technology will make 
our decisions for us. We'll listen to technology because our modern 
ears listen to little else. In the absence of other firm beliefs, we'll let 
technology steer. No other force is as powerful in shaping our destiny. 
By imagining what technology wants, we can imagine the course of our 

The future of technology is networks. Networks large, wide, deep, 
and fast. Electrified networks of all types will cover our planet and their 
complex nodes will shape our economy and color our lives. The shift to 
this new perspective will be neither immediate nor painless. Nor will it 
be as strange as it first appears. 

There is no reason to accept the imperative of technology without 
challenge, but there is also no doubt that technology's march is clearly 
aimed toward all things networked. Those who obey the logic of the net, 
and who understand that we are entering into a realm with new rules, 
will have a keen advantage in the new economy. 


1) Embrace the Swarm. As power flows away from the center, the 
competitive advantage belongs to those who learn how to embrace de- 
centralized points of control. 

2) Increasing Returns. As the number of connections between 
people and things add up, the consequences of those connections 
multiply out even faster, so that initial successes aren't self-limiting, but 

3) Plentitude, Not Scarcity. As manufacturing techniques perfect 
the art of making copies plentiful, value is carried by abundance, rather 
than scarcity, inverting traditional business propositions. 

4) Follow the Free. As resource scarcity gives way to abundance, 
generosity begets wealth. Following the free rehearses the inevitable fall 
of prices, and takes advantage of the only true scarcity: human atten- 

5) Feed the Web First. As networks entangle all commerce, a firm's 
primary focus shifts from maximizing the firm's value to maximizing 
the network's value. Unless the net survives, the firm perishes. 

6) Let Co at the Top. As innovation accelerates, abandoning the 
highly successful in order to escape from its eventual obsolescence be- 
comes the most difficult and yet most essential task. 

7) From Places to Spaces. As physical proximity (place) is replaced 
by multiple interactions with anything, anytime, anywhere (space), the 
opportunities for intermediaries, middlemen, and mid-size niches ex- 
pand greatly. 

8) No Harmony, All Flux. As turbulence and instability become the 
norm in business, the most effective survival stance is a constant but 
highly selective disruption that we call innovation. 

9) Relationship Tech. As the soft trumps the hard, the most pow- 
erful technologies are those that enhance, amplify, extend, augment, 
distill, recall, expand, and develop soft relationships of all types. 

10) Opportunities Before Efficiencies. As fortunes are made 
by training machines to be ever more efficient, there is yet far greater 
wealth to be had by unleashing the inefficient discovery and creation of 

new opportunities. 


This book benefited greatly from the work of researcher Jan Tudor, of JT 
Research in Portland, Oregon. Many people, including a number of qual- 
ified economists, supplied me with very helpful comments after reading 
the article upon which this book is based. These readers included Paul 
Romer, Paul Krugman, and George Gilder. Romer, Krugman, John Ha- 
gel, Paul Saffo, and Michael Kremer also provided interviews to me as 
well. A few other people took valuable time to read and comment on the 
manuscript version: John Heileman of The New Yorker, Russ Mitchell of 
U.S. News a[ World Report, Peter Schwartz of Global Business Network, 
and Hal Varian of the University of California, Berkeley. The fact-checking 
crew at Wired magazine made significant contributions, and as usual, 
saved me from embarrassment. At Viking, editor David Stanford turned 
my rough draft into a smooth piece of English while copy editor Danny 
Marcus further polished it to its present form. Many of the concepts 
expanded here originated in long conversations with John Perry Barlow, 
who was often the first to appreciate their power. John Brockman, my 
literary agent, saw a book in my ideas. My wife, Gia-Miin Fuh, sacrificed 
her weekends so I could write it; without that gift, this book wouldn't 
have happened. Thank you, all. 


4 In DeLong's view: DeLong's essay 
"Old Ideas for the New Economy," in 
8 "Listen to the technology": Quoted by 
George Gilder in the Gilder Technology 
Report, November 1996. 
10 a transistor cost: "Happy 50th" by 
Heidi Elliott, in Electronic Business, De- 
cember 1997. 

10 trillion objects manufactured: 

Estimated by multiplying the estimated 
average number of objects one person 
buys in a year by the number of adults. 
10 200 million computers: DataQuest. 
10 number of noncomputer chips: Data- 

14 Tree of Life: http://phylogeny.arizona. 

15 CM saves $1.5 million: "What Com- 
plexity Theory Can Teach Business" by 
David Berreby, in Strategy s[ Business Is- 
sue 3, 1996. 

16 a computer flight simulator: This 
audience participation technology is 
operated by Cinematrix Interactive En- 
tertainment Systems, Novato, CA, (415) 
892-8254, or 

28 " If a product": "Increasing Returns 
and the New World of Business," by 
W. Brian Arthur, in Harvard Business Re- 
view, July 1996. 

31 "Technology is the campfire": 

"Change is Good," Wired, January 1998. 
36 "the only reliable predictor": "Chaos 
in Hollywood" by John Cassidy, in The 
New Yorker, March 31, 1997. 
49 Gilder's Law: "Fiber Keeps Its Prom- 
ise," by George Gilder, in Forbes ASAP, 
April 1997. 

52 "in the Network Economy": "Enter- 
tainment Values: Will Capitalism Go 
Hollywood?" by Paul Krugman, in Slate, 
January 22, 1998. 

55 "What information consumes": "The 

Information Economy" by Hal Varian, 
Scientific American, September 1995. 
56 first 1,000 days of the web's life: 
Brewster Kahle's internet backup site 

59 "The creator who": "Intellectual 
Value" by Esther Dyson, in Wired, July 

63 "A web limits risk": "Spider versus 
Spider" by John Hagel III, in McKinsey 
Quarterly, 1966 No. 1. 

63 "Players compete not by locking in": 
"Increasing Returns and the New World 
of Business," by W. Brian Arthur, in Har- 
vard Business Review, July 1996. 

64 in the 1890s, electricity: "Computer 
and Dynamo" by Paul David, in Technol- 
ogy and Productivity, OECD, 1991. 

68 "Law is becoming irrelevant": 
Quoted by David Brin in The Transparent 
Society, Addison-Wesley, 1998. 

69 boasted of an estimated 120 million: 
Nua Ltd., May 1998. 

69 If current rates continue: Interna- 
tional Telecommunications Union 1998 

71 $212 billion on information: Informa- 
tion Technology Industry Council. 

72 Rocky Mountain Institute: Home 
page at 

72 electronics in a car: "Ubiquitous 
Computing" by Sean Baenen at Global 
Business Network. 

75 "The time may come": Pop Interna- 
tionalism, by Paul Krugman, MIT Press, 

80 "Firms are remarkably creative": 

Mastering the Dynamics of Innovation, by 
James M. Utterback, Harvard Business 
School Press, 1994. 
83 "Successful firms often": "Recent 
Evolutionary Theorizing About Economic 
Change," by Richard Nelson, in Journal 
of Economic Literature, March 1995. 

1 66 / Notes 

85 David Ackley: "Interactions Between 
Learning and Evolution" by David H. 
Ackley and M. L. Littman, in Artificial 
Life II, edited by C. C. Langton, Addison- 
Wesley, 1992. 

104 the half-life of Texan businesses: 

"A Nanaoeconomic Perspective on the 
Growth and Development of the Texas 
Manufacturing Base, 1970-1991," by 
Donald Hicks, in A Report Prepared for 
the Office of the Comptroller, State of 

104 the European Union: "A Second 
American Century" by Mortimer B. Zuck- 
erman, in Foreign Affairs, May/June 1998. 
106 "You're pitchforking a bunch of 
freelancers": Bruce Sterling's speech at 
the 1998 Computers Freedom and Pri- 
vacy Conference in Austin, Texas. 
106 entertainment complex: "Why Every 
Business Will Be Like Show Business," 
by Joel Kotkin and David Friedman, in 
Inc, March 1995. 

110 "the Mecca of the economist": 

Quoted by Richard Nelson, in "Recent 
Evolutionary Theorizing About Economic 
Change," by Richard Nelson, in Journal 
of Economic Literature, March 1995. 
118 an emerging standard called P3P: 
Maintained by Firefly, 
122 sites such as junglee or Jango: www., 
125 "the new economy begins": "What's 
So New about the New Economy?" by 
Alan Weber, in Harvard Business Review, 
January/February 1993. 
127 "Whatever the Government": "The 
Telephone Transformed — Into Almost 
Everything," by James Gleick, in 

The New York Times Magazine, May 16, 

128 protocols such as Truste: www. 

134 4 quadrillion dollars: This rough 
guesstimate was extrapolated from the 
annual growth in the world's GDP. Since 
the economy grows about 1% annually, 
and that growth is 4 billion, the full size 
of the world's economy is close to a hun- 
dred times bigger, or 4 quadrillion. 
134 "Humans on average": The Ultimate 
Resource, by Julian Simon, Princeton Uni- 
versity Press, 1996. 

137 More than 320 million web pages: 

Brewster Kahle's internet backup at 

139 "Productivity isn't everything": The 

Age of Diminishing Expectations, by Paul 
Krugman, MIT Press, 1994. 

140 a rise in productivity: The Rise of 
the Network Society, by Manuel Castells, 
Blackwell Publishers, 1996. 

141 IBM alone sold: "Mainframe Busi- 
ness, Though Faded, Is Still Far from Ex- 
tinct" by Lawrence Fisher, The New York 
Times, May 18, 1998. 

144 "When a merchant sells a con- 
sumer": Unlimited Wealth, by Paul Zane 
Pilzer, Crown Publishers, 1990. 

145 93% of Americans officially classi- 
fied: Quoting Federal Reserve Bank of 
Dallas economist Michael Cox, in an 
interview in "Wealth If You Want It," by 
Kevin Kelly, Wired, November 1996. 
148-49 28% of U.S. households: "A Sec- 
ond American Century," by Mortimer B. 
Zuckerman, in Foreign Affairs, May/June 

150 "Lending to poor people": "Credit 
where credit is due: Bringing 
microfinance into the mainstream," by 
Peter Montagnon, Center for the Study 
of Financial Innovation, February 


The following books are ranked by relevance and degree of insight to under- 
standing the new economy. This list starts with those I found most pertinent 
and ends with those that served as background. Left unlisted are many good 
books on economics and new business that contained only a few relevant 
ideas to this subject. Some of these additional resources are mentioned in 
my source notes. Following the annotated books is a list of useful web sites 
which have the best and most current material. 

Information Rules: A Strategic Guide to the Network Economy, by Carl 
Shapiro and Hal R. Varian. Harvard Business School Press, 1998. If you want 
to go beyond the fundamental principles outlined in my book, try this one. 
This book is the best overview of the network economy yet, rigorously writ- 
ten by two bona fide economists, with careful analysis and plenty of real-life 
examples. Their emphasis is on high-tech and online environments, but their 
understanding is on target and widely applicable. Five stars. 

Enterprise One to One: Tools for Competing in the Interactive Age, 
by Don Peppers and Martha Rogers. Doubleday, 1997. An excellent investiga- 
tion into the future shape of relationships in the new economy. I learned all 
kinds of unexpected things from this well-written and witty book. It is very 
pragmatic about business tactics (how to get your company to interact with 
customers), but it also articulates useful economy principles at the strategic 
level as well. The authors seem to have an intuitive grasp of how the new 
economy is unfolding. 

Net Cain: Expanding Markets Through Virtual Communities, by John 
Hagel III and Arthur G. Armstrong. Harvard Business School Press, 7997. 
A highly original and extremely insightful view of the new economy seen 
through the lens of commercial communities. It shifts focus away from firms 
or customers and onto emerging networks. It sees virtual communities as 
serious business. Although not economic in its sensibilities, this is one of the 
best books about the network economy. Highly recommended. 

The Rise of the Network Society, by Manuel Castells. Volume 1 of the Infor- 
mation Age. Blackwell Publishers, 1996. A dense, sprawling, comprehensive 
vista of the ongoing transformation of society by network technologies. Cas- 
tells is a sociologist with a European's bent for the large-scale sweep of his- 

1 68 / Annotated Bibliography 

tory. This book, the first in a trilogy, is a catalog of evidence for the arrival of 
a new global, networked-based culture. The immense scope of this change is 
reflected in the immense, and at times unwieldy, scope of this book. Castells' 
literate and broad view is what makes it worthwhile. 

Blur: The Speed of Change in the Connected Economy, by Stan Davis and 
Christopher Meyer. Addison-Wesley, 1998. Further explorations of the conse- 
quences of the network economy. The authors list three primary forces over- 
turning the old order: speed, intangibles, and connectivity (which parallel my 
three of globalization, intangibles, and connectivity). They have lots of busi- 
ness examples and yet more strategies. 

Unleashing the Killer App: Digital Strategies for Market Dominance, by 
Larry Downes and Chunka Mui. Harvard Business School Press, 7998. Despite 
the slightly misleading title, this book celebrates the network economy. It ar- 
rives at similar conclusion as I do, and it even has its own list of new rules 
(on page 77). However, its focus is on the practical creation of a business 
service or product in the new economy. It is not as methodical or complete as 
Information Rules, but I think it is a good general businessperson's introduc- 

Webonomics, by Evan I. Schwartz. Broadway Books, 7997. Schwartz fo- 
cuses very specifically on the practical problems of using web sites to create 
commerce. His nine principles for doing business on the web won't hold true 
for the entire new economy, but they are pointed in the right direction. If you 
are running a commercial web site, his advice is certainly helpful. 

The Digital Estate: Strategies for Competing, Surviving, and Thriving in 
an Internetworked World, by Chuck Martin. McGraw-Hill, 7996. A super book 
for getting a feel for the new online business culture. Martin gives you a vis- 
ceral sense of the tremendous cleverness, brilliant innovations, and experi- 
mental business models happening "out of sight" on the web. He's a great 
tour guide to this strange new territory, and the best way to get a sense of 
"what's happening" in online commerce. 

The Economics of Electronic Commerce, by Andrew B. Whinston, Dale O. 
Stahl, and Soon-Yong Choi. Macmillan Technical Publishing, 7997. Electronic 
commerce is barely born and already has its textbook. This one is a pretty 
good textbook, too. The material is wonderfully interdisciplinary, covering 
economics, engineering, finance, and marketing. In addition to the usual pa- 
pers and book references, the authors also list plenty of relevant web site 
urls. For doing business online, this textbook is better than having an MBA. 

The Digital Economy: Promise and Peril in the Age of Networked Intel- 
ligence, by Don Tapscott. McGraw-Hill, 7996. In a not very organized fashion, 
this book wanders through some of the emerging dynamics of the network 
economy. There are lots of examples of new economy business, but with little 
theory, and a minimum of analysis. Overall, he is good at picking out new 

Annotated Bibliography / 169 

economy business trends. 

Electronic Commerce: A Manager's Guide, by Ravi Kalakota and Andrew 
B. Whinston. Addison-Wesley, 7997. One of those books that are very timely at 
the moment, but will date quickly. Here is everything known in 1997 about 
managing electronic commerce on a web site. How to do firewalls, transac- 
tion security, and electronic payments from the view of a nonprogramming 
mid-level manager. If the authors are smart, they'll keep this tome updated. 

The Weightless World: Strategies for Managing the Digital Economy, by 
Diane Coyle. Capstone Publishing, 7997. This book, unlike many of the others 
listed here, is more concerned with the economic consequences, rather than 
the business implications, of the new economy. Coyle begins to grapple with 
the issues such as welfare, governance, and policy decisions which a "weight- 
less" world of information will demand. Another way of saying this is that 
Coyle often considers the downsides of the new economy. Such questioning 
is sorely needed. 

Release 2.0: A Design for Living in the Digital Age, by Esther Dyson. Broad- 
way Books, 1997. A pretty good primer aimed at lay people explaining the 
social consequences of network society and culture. Covers a full range of 
topics from privacy to identity to communities and intellectual property. Sort 
of like a orientation tour of this exotic tomorrowland. 

The Age of the Network: Organizing Principles for the 21st Century, by 
Jessica Lipnack and Jeffrey Stamps. Oliver Wright Publications, 1994. Despite its 
very new-agey tone, this book is useful as a background. It combines the un- 
derstanding of everyday social networks with the understanding of electronic 
networks to provide some key insights into how human networks in general 
work. And it makes clear their increasing influence. 

Bionomics: Economy as Ecosystem, by Michael Rothschild. Henry Holt and 
Company, 7990. A chatty amplification of a very fundamental metaphor — the 
economy behaves like a ecosystem. Buried in the stories about trilobites and 
bacteria, are some very keen insights about the network economy. 

The Death of Competition: Leadership and Strategy in the Age of Busi- 
ness Ecosystems, by James F. Moore. HarperCollins, 7996. The closest analogy 
to a network is an ecosystem. Moore plumbs the biological metaphor in great 
detail and with more success, perhaps, than Bionomics does. I consider these 
ideas prime territory still waiting to be exploited. This book is a good start. 

The Economy as an Evolving Complex System, edited by Philip W. 
Anderson, Kenneth J. Arrow, and David Pines. Addison-Wesley, 7988. The 
published proceedings from a landmark workshop on ecological approaches 
to deciphering the economy. Very technical and academic, but also very 

Increasing Returns and Path Dependence in the Economy, by W. Brain 
Arthur. University of Michigan Press, 1994. If you are willing to try unprocessed 

170 / Annotated Bibliography 

originals, the papers in this collection can illuminate the key and pivotal 
function of increasing returns. Written by the economist who coined the term, 
at least some of the papers are accessible and clear to lay readers. 

The Winner-Take-All Society, by Robert H. Frank and Philip J. Cook. Pen- 
guin Books, 7995. Since there is a winner-take-most element to the network 
economy, this readable book-length essay is quite provocative. 

Internet Economics, edited by Lee W. McKnight and Joseph P. Bailey. MIT 
Press, 1997. A well-chosen selection of scholarly papers outlining the economic 
problems created by internet commerce. Most questions in the compendium 
deal with the baffling problem of how to price services in a distributed envi- 
ronment. How should shared connections, or insurance, or occasional links 
be priced? How should traffic be regulated? What shape will money take? 
This is the engineer's approach to economics. 

The Death of Distance: How the Communications Revolution Will Change 
Our Lives, by Frances Cairncross. Harvard Business School Press, 1997. An accu- 
rate book, but with the thin and well-worn announcement that global com- 
munications are changing the world. Low on surprises or insight, but full of 

The Self-Organizing Economy, by Paul Krugman. Blackwell Publishers, 
7996. A slim volume of fairly technical descriptions of how decentralized, 
bottom-up self-organization can shape some economic phenomenon, such 
as cities. 

The Future of Money in the Information Age, edited by James A. Dorn. Cato 
Institute, 7997. Money, which is a type of information, is changing as fast as 
the economy it circulates in. This is an academic view of how money and fi- 
nancial institutions are transforming. 

Digital Money: The New Era of Internet Commerce, by Daniel Lynch and 
Leslie Lundquist. John Wiley e( Sons, 7996. Lynch, a founder of a digital cash 
system, paints a portrait of the new economy as viewed from the perspective 
of liquid, intangible e-money. The shape of money in the future is a huge, vi- 
tal, and unknown question, one that I skirted for space reasons. This book is 
a great place to catch up. 

Cybercorp: The New Business Revolution, by James Martin. Amacon, 
7996. Martin is a legendary telecom guru who has written over a hundred 
books. This one is a jumble of buzz words, astounding insights, tired cliches, 
astute musings, interesting graphs, corny lessons, wonderful statistics, lame 
explanations, and bubbly enthusiasm. He's often right, and he is focused on 
the new economy, but the reader will have to do the winnowing. 

The Twilight of Sovereignty, by Walter B. Wriston. Charles Scribner's Sons, 
7992. Not as revolutionary as it was when it was first published in 1992, this 
short book still makes a very intelligible case for a new economy birthing. 
Wriston pays particular attention to the geopolitical impacts of a networked 

Annotated Bibliography / 171 

information economy. 

Shared Minds: New Technologies of Collaboration, by Michael Schrage. 
Random House, 7990. Although not explicitly about networks or network 
technology, this book is about what happens when you use tools — such as 
networks — to create collaborations of minds, for both work and play. It is 
more about the future of business organization than most books advertised 
as such. 

Regional Advantage: Culture and Competition in Silicon Valley and Route 
128, by Annalee Saxenian. Harvard University Press, 1994. A wonderful book 
about the success of network culture in Silicon Valley, brought into relief by 
comparing it to the older, but less successful and less networked, high-tech 
culture based in the vicinity of Boston. 

Innovation Explosion, by James Brian Quinn, Jordan J. Baruch, and Karen 
Anne Zien. The Free Press, 1997. If knowledge is the new capital, then innova- 
tion is the new currency. Quinn and colleagues do a masterful job of plac- 
ing innovation as the central dynamic in a knowledge economy. They have 
rounded up anecdotes, statistics, and bullet points galore to create a believ- 
able case for why innovation is the key variable in the network economy. 

Post-Capitalistic Society, by Peter Drucker. HarperCollins, 7993. An early 
picture of the coming new economy which has not aged a bit. Drucker is 
always worth reading. 

Unlimited Wealth: The Theory and Practice of Economic Alchemy, by Paul 
Zane Pilzer. Crown Publishers, 1990. This one is an outlier, a little on the ex- 
treme side. More than most observers, Pilzer is not hesitant to speculate on 
the ways in which technology increases prosperity in an economy. His hereti- 
cal ideas are refreshing. 

The Third Wave, by Alvin Toffler. Bantam, 79S0. A classic, and yet still 
incredibly up-to-date and informative. Toffler's 20-year-old profile of a new 
economy and new culture is more readable and more accurate than most 
depictions written since. 

New Ideas from Dead Economists: An Introduction to Modern Economic 
Thought, by Todd C. Buchholz. Penguin Books, 7990. Most "new" ideas in eco- 
nomics, as in everything else, are not new at all. This compact volume is the 
best one-stop shop for extracting the best thoughts of previous economists. 
Painless and edifying, this text should be in every network economist's li- 

The Information Economy, 
infoecon/ The most complete web site for the new economy. This clear, wide- 
ranging, and very up-to-date site, run by economist Hal Varian, coauthor of 
Information Rules (see above), lists papers, works in process, and hundreds 
of links to other new economy sites. Almost any web site that is remotely 
connected to the information or network economy is linked here, including, 

172 / Annotated Bibliography 

for example, the follow two sites. 

George Gilder's Telecosm Index. 
ggindex.html Chapters of author George Gilder's epic book-in-progress on the 
emerging telecommunications universe are archived here. Gilder's thinking 
is seminal, and many of my own rules owe much to him. Keep an eye out for 
his book Telecosm, due out in late 1998; until then, these articles from Forbes 
are a real goldmine. 

The Economics of Networks, 
This site is primarily dedicated to examining the economic implications of 
communication networks. It is crammed with papers by the site organizer 
(economist Nicholas Economides), but also includes a very handy bibliogra- 
phy and master list of all other economists working on the economics of net- 


Page numbers in italics refer to charts and figures. 

Ackely, David, 89-90 
advertising, 102, 152-53 
agriculture, 6-7, 8, 79 
airplanes, airline industry, 14, 125, 149, 

allegiance, 28, 65-66, 132, 127 

America Online (AOL), 49, 64, 121 

Anderson, Laurie, 33 

antitrust hearings, 27 

Apache, 6l, 64 

Apple Computer, 29, 41, 82, 110 
architecture, 81 

Arthur, Brian, 25, 27, 29, 66-67, no 
ATMs, 41-42, 98, 120 
atoms, 9, 75 
attention, scarcity of, 59 
automobiles, automobile industry, 3, 4, 
50, 54, 69, 92-93, 96, 122 

dumb chips in, 11, 12 

economies of scale in, 26 

hypercars, 76 

lightweight, 73, 73, 75-76 

painting of, 15 

bandwidth, 52, 118-19 
banks, banking, 98, 156, 158 
ATMs and, 41-42, 98, 120 
Barbie dolls, customized, 122 
Barnes and Noble, 127 
barter, 7 

Beethoven, Ludwig van, 145 
Berkeley Mac User Croup, 131 
Best, Steven, 159 
Best Bananas, 97-98 
Betamax, 29 

biological models, 31, 32-33, 83-85 
Bionomics (Rothschild), 149-50 
biotechnology, 88 
Bloomberg terminals, 41 
books, 126-27 

Bose-Einstein distribution, 38 
brain, human, 13 
Brand, Stewart, 60, 61 
Bressand, Albert, 124-25 
Brin, David, 131, 145-46 
Browning, John, 24 

Built to Last (Collins and Porras), 116-17 
bullet trains, 16 

cameras, digital, 37 
capital, sources of, 156 
Carpenter, Loren, 17-18 
carpets, value of, 40 
cassette tapes, 44 
CD-ROMs, 91 
CDs, 144 

music, 67, 98-99 
cellular neurons, 6, 13 
cellular phones, 44, 58 
cement business, 14-15 
Cemex (Cementos Mexicanos), 14-15 
Cendant, 63 
change, 108-9, 114-16 

of customer preferences, 123, 128-30 
chaos vs. order, 113-14, 173 
Chemical Bank, 42 
Cisco, 27 
Citibank, 41-42 
closed (proprietary) systems: 

avoiding of, 48-49 

opening up, 39, 41-42 
CNN, 107 

collaborative filtering, 128 
Collins, James, 116-17 
commodities, flow of, 48 
Commodore 64, 45 

communication, l, 4, 5-6, 33, 52, 150-51 
real-time, 12, 15, 21 
in spaces, 95-96, 95 
see also email; internet; 

telecommunications; telephones 

174 / Index 

community, 104-6, 104 
Compaq, 133 
competition, 26, 70 

increasing returns and, 27, 29 
compounded results, 142, 144 
computer chips, n, it, 51 

as "enabling technology," 5 
computers, 3, 5, n, 13, 14, 37, 67 

conferencing systems for, 70-71 

disappearance of, 19-20 

mainframe, 149 

productivity and, 148-49 

user groups for, 130-31 

see also email; internet; World Wide 

connections, 12-22 

customer-to-customer, 138 

exponential growth and, 23-25 

opportunities and, 145 

plentitude and, 46 

relationships and, 137, 138-39 

swarm technology and, 13-18, 21-22 
Connection Test, 137 
contracts, 120 
copies, 40-41, 54 
creative destruction, 86 
C2Net, 64 

equity, 156-59 

technology as, 33-35 
customer preferences, 122-30 

anticipation of, 123, 125-28 

changing of, 123, 128-30 

creating of, 122, 123 

remembering of, 122, 123-24 
customers, 27, 118-39 

as employees, 120, 121, 139 

fanatical, 131-32 

learning and, 129 

as prosumers, 121-24 

smart, 62, 130-31, 130, 138 

wisdom of, 132-34 
customization, 121-23 
Cygnus Solutions, 64 

Darwin, Charles, 140, 141 
David, Paul, 149 

decentralization, 9-22, 158-59, 161 

strategies for, 19-22 

swarm technology and, 13-18, 21-22 
decision making, 70, 81 

decreasing returns, law of, 25 
DeLong, Brad, 4 

demand, demand curves, 55-56, 55, 153 
De Vany, Art, 38 
devolution, 83-93, 

avoiding shortsightedness and, 87-89, 
91-92, 92 

being in charge of, 93 

in better companies, 86-87 

start-ups and, 89-90 

strategies for, 91-93 
Dialog, 151 
Direct-TV, 58 

disease, tipping point of, 34 
disequilibrium (flux), 108-17, 709, 159, 

innovation and, 112-14 
stagnation and death vs., 110-12 
strategies for, 116-17 

disintermediation, 98-99 

Disney, 88 

dolls, customized, 122 
dominance, 27, 34, 43 
Doom, 48 
DOS, 41, 130 
Downes, Larry, 74 
Drucker, Peter, 72, 146 
Drucker's Rule, 37 
Drudge, Matt, 98 
dumb chips, see "jelly beans" 
DVD video standard, 67 
Dvorak keyboard, 29 
Dyson, Esther, 63 

economic growth, 140-41, 146, 147, 

economic sectors, "enabling," 5 

economies of scale, 26, 28 

economy, U.S.: 

intangible trade in, 3-4 
manufacturing in, 7-8, 26, 147 
waxing and waning of sectors in, 4 

efficiency, 147, 149 

800 numbers, 120 

electricity, 68, 69, 149, 153 

ElectronicCast, 13 

email, 16, 42, 43, 45, 100, 119, 128, 143 
embedded phase, 67, 68-69, 80-81 
e-money, 68, 105 

employment, employees, 7-8, 78-79, 
101, 109-10, 709 

Index / 175 

customers vs., 120, 121, 139 
"enabling technologies," 5 
Encyclopaedia Britannica, 60, 91 
Enterprise One to One (Peppers and 

Rogers), 124 
entertainment, 3, 4, ill 

see also books; movies; music; 
equity culture, 156-59 
Ethernet, 24 
E-trade, 138 
Eudora, 57 

European Union, 109-10 

evangelists, 81-82 

evolution, 89-90, 140, 141 

executive function, 148 

expectations, 31-32 

experience curve, 150 

exponential growth, 23-25, 30-31,30, 

externalities, 26-27, 36 

Fairchild Semiconductor, 53 
farming, 6-7, 8, 79 
Fast Company (Weber), 132 
fax effect, 39, 44 

fax machines, faxes, 27, 30, 31, 39-40, 
40, 41,44 

Federal Aviation Administration (FAA), 14 
Federal Express (FedEx), 10, 30, 30, 31, 

feedback loops, 51 

creation of, 36-37 

positive, 26, 29 

self-negating, 36 

self-reinforcing, 36-37, 141 
feeding the web first, see prosperity 
finance, 5-6, 156 
Firefly, 125-27, 132-33 

customer's relationship with, 119-20, 
122-30, 134-39 

devolution of, see devolution 

prosperity and, 65-69 

size of, 101-3, 707 

see also specific firms 
flight simulation, 17 
floppy disks, 144 
fluid phase, 67, 68-69 
flux, see disequilibrium 
Ford, Henry, 26 

"free flight," 14 

ftp capability, 42 

Future Shock (Toffler), 121, 132 

Cage, John, 6i 

General Motors (CM), 3, 15, 101 
generosity, 50-64, 161 

anticipating cheapness and, 53, 64 

sharing and, 60-62 

strategies for, 62-64 

supply and demand and, 55-56, 55 

value and, 57-60 
Gibson, William, 151 
GIF images, 41 
Gilder, George, 52, 146 
Gilder's Law, 52, 54 
Gleick, James, 134 
globalism, 2, 74, 119, 156-59 
Gould, Steven Jay, 141 
Grameen Bank, 158 
Great Asymmetry, 141-42, 145, 154 
Grove, Andy, n 
Gutenberg, Johann, 40 

Hagel, John, 31, 66, 129 

hand-made items, 78 

Hicks, Donald, 109 

hierarchies, 119 

hobby tribes, 105-6, 131-32 

Hollywood movie industry, in, 148 

Home Motor, 19 

home-shopping networks, 34-35 

Houston, Tex., swarm technology in, 16 

HTML, 71 

Hyde, Lewis, 60 

hypercars, 76 

IBM, 89, 107, 149 
identity, 65, 126-27, 133 
immune system, 13 
Inc., 109, in 

increasing returns, law of, 25-30, 25, 36, 

80, 90, 105 
incubations, long, protection of, 37 
indexes, 59 
individualism, 102-3 
industrial economy, 19, 25, 45, 50, 78, 79, 
83, 84, 102, 108 

economies of scale in, 26, 28 

expectations in, 31-32 

undoing of, 112-14 

176 / Index 

information (knowledge), 2, 3, 4, 51, 56, 
76-79, 105, 119, 156 
distribution of, 20-21 
material , 73-76, 73 
peers and, 119-20, 128-32 
prosperity and, 73-79, 73 
symmetry of, 134-37 
innovation, 27-28, 31-32, 46, 80, 90-91, 

disequilibrium and, 112-14 
momentum vs. significance of, 35 
opportunities and, 142-44, 743 
skunk works mode and, 89-90 

as characteristic of new economy, 2-5 
copies of, 40-41 

see also information; relationships 

Intel, 67 

interfection, 80 

intermediaries, 96-102, 99 
nodes as, 100-102 

internet, 13, 16, 18, 33-34, 42, 60, 146 
economy of, 76-77 
exponential growth of, 30, 31 
service providers for, 36-37 
see also email; World Wide Web 

internet protocols (IP), 80-81 

inventory, 12 

investment, 156-59 

Iran, Shah of, 44 

iron oxide, 144 

ITU (International Telecom Union), 72 

Japan, 75, 147 

swarm technology in, 16 

Tamagotchis in, 32 
Java, 57, 58 

"jelly beans" (dumb-chips), 10-22, 31 
computer chips compared to, n, 11 
swarm technology and, 13-18, 21-22 

Keely, Larry, 14 
Kellner, Douglas, 159 
Kessler, Andrew, 150 
keyboards, 29 
Khomeini, Ayatollah, 44 
KLM, 152 
Kmart, 85 

knowledge, see information 
Kotkin, Joel, m 

Krugman, Paul, 55-56, 78-79, 147, 149 

Lanier, Jaron, 137, 152 
leadership, 17-18 
learning curve, 51, 53, 149-50 
Lessig, Lawrence, 71 
Liberman, Alexander, 151 
Linux, 6i 

Lovins, Amory, 76 
loyalty, 28, 65-66, 132 
Lucas, George, 145 
Luddites, 8 

McDonald's, 61 
manufacturing, 26, 147, 148 

employment in, 7-8 
Marshall, Alfred, 115 
Marx, Karl, 115 
mass customization, 121-23 
Mastering the Dynamics of Innovation 

(Utterback), 85 
MCI, 13 

Mead, Carver, 8 

Mercedes-Benz, 12 

mess media, 106 

Metcalfe, Bob, 24 

Metcalfe's law, 24, 30 

Mexico, cement business in, 14-15 

microloans, 158 

Microsoft, 4, 6, 27, 31, 33-34, 91, 101, 125 

profits of, 30, 30, 33 
Microsoft Internet Explorer, 57 
Microsoft Network (MSN), 49 
Milgrom, Paul, 87 
modems, high-speed, 36-37 
monopolies, 27-28 
"monovation," 27 
Moore, Cordon, 52, 63-64 
Moore's Law, 52 
movies, 37-38, in, 126-27, 148 
MPEG standard, 81 
Mui, Chunka, 74 
music, 145 

CDs, 67, 98-99 
mutual funds, 156, 157-58 
My Launch, 125 

National Semiconductor, 10 
needs vs. wants, 152-53 
Negroponte, Nicholas, 73, 76, 93 
Nelson, Richard, 88 
net, as symbol for future, 9 
Net Cain (Hagel), 31, 129 

Index / 177 

Netscape, 57, 58 
NetWare, 64 

network externalities, 26-27, 36 

networks, network economy: 

conversation compared to, 133-37 
decentralization and, 9-22, 11 
defined, 31 

exponential growth of, 23-25, 30-31, 30 

hierarchies vs., 119 

maximizing of value of, 67-69 

as meta-country, 72 

opportunities and, 145 

phases of, 67-69 

as possibility factory, 46-47 

smaller, coordination of, 36 

workings of, 2-3, 9-12 

see also specific topics 
new economic order: 

characteristics of, 2-8 

see also specific topics 
New York Times, 134 
Nintendo, 85 
nodes, 10, 12, 21, 46, 100 

animated, 12-13, 20 

arithmetic increase of, 23 

as intermediaries, 100-102 
Novell, 64 
Noyce, Robert, 53 
nuclear power, 84 

oil, oil industry, 37, 75 

opportunities, 39, 43-49, 140-55, 161 
innovations and, 142-44, 743 
interconnectedness and, 45 
as origin of wealth, 141-44, 142 
of others, maximizing of, 47-48 
seeking of, 146 

as source of other opportunities, 

strategies for, 154-55 
Oracle, 27 

order vs. chaos, 113-14, 713 
Out of Control (Kelly), 17-18 

passport profile, 125 
peers, 119-20, 128-32 
Pentiums, 45 
Peppers, Don, 124 
perfection, letting go of, 86-87 
Perl, 6i 

Peters, Tom, 86, 94 

pets, electronic, 32 
pharmaceuticals, 48 
Pilzer, Paul, 152 

plentitude, 39-49, 43, 55, 80, 161 
law of, 45-46 

opening closed systems and, 39, 

opportunity and, 39, 43-49 
strategies for, 47-49 
value and, 39-42, 40 
Plus, 42 

"polyvation," 27-28 
Porras, Jerry, 116-17 
Porter, Michael, 90 
postmodernism, 159 
Postmodern Turn, The (Best and Kellner), 

poverty, the poor, 153, 158 
Powerbooks, 45 
prestandard phase, 67-68 
prices, 27, 29, 64, 77 

decline of, 50-53, 56-57, 149-50 
privacy, 133-37 
problem solving, 146 
productivity, 118, 119, 147-52, 154 
productivity paradox, 149 
proprietary systems, see closed 

(proprietary) systems 
prosperity (feeding the web first), 65-82, 
66, 138, 161 

information and, 73-79, 73 

strategies for, 79-82 

technical standards and, 70-73 

value and, 67-69, 79-80 
prosumers, 121-24 
P3P standard, 125 
publicly traded companies, 158-59 

Qualcomm, 57 
QWERTY keyboard, 29 

Radio Shack, 52 
railways, 15-16, 68 
RCA, 53 

Reader's Digest, 59 
RealAudio, 41 

real-time communications, 12, 15, 21 
refrigerators, 51-52, 153 
Regional Advantage (Saxenian), 28 
relationships, 2, 3, 45-46, 118-39 
amplification of, 118-19 

178 / Index 

customer and firm, 119-20, 122-30, 

relationships (cont.) 

peerlike, 119-20, 128-32 

as social web, 28 

strategies for, 138-39 

symmetry of knowledge in, 134-37 

trust and, 119, 123, 132-38 

value of, 124-25 
relationship technology (R-tech), 124-30, 

132-33, 135-38, 161 
reputation, 119 

returns, increasing of, see success, self- 
reverse market, 129-30 
Ritz-Carlton Hotel, 125 
Roberts, John, 87 
Rogers, Martha, 124 
Romer, Paul, 110, 144 
Rothschild, Michael, 149-50 
Russia, 116 

safety, aircraft, 14 
Saffo, Paul, 91, 97 
Sanders, Jerry, 53 
Saxenian, AnnaLee, 28 
scarcity, 39, 40, 49, 59, 78, 144 
scavenger bots, 143 
Schrage, Michael, 119 
Schumpeter, Joseph, 86 
Schwartz, Evan, 127 
searching, as a way of life, 93 
Sears, Roebuck, 19, 85, 98 
Sega, 59, 85 

semiconductor transistors, 10, 53, 149, 

service sector, 7 

Shared Minds (Schrage), 119 

shareware, 6i 

shopping, 129 

home, 34-35 

supermarket, 46 
significance, threshold of, 34-35, 34 
silicate glass fiber, 9, 20 
silicon chips, 9, 20 

cost of, 10, 11, 51, 52 

as cultural neurons, 6 

dumb, see "jelly beans" 

size of, 10 

see also computer chips 
Silicon Valley, 25-26, 28, 74, m, 159 

Simon, Herbert, 59 

Simon, Julian, 141 

skunk works mode, 89-90 

Smith, Adam, 115 

software, 3, 4, 13, 48, 61-62, 71 

Solow, Robert, 149, 153-54 

Sony, 85 

Sony Betamax, 29 
spaces, 94-107, 161 

community and, 104-6, 104 

economy's shift to, 95-97 

intermediaries and, 96-102, 99 

middle, 103-4, 70 4 

places compared to, 94-96, 95 

size and, 102-3 

strategies for, 107 

taste, 125-26, 126 

technical concept of, 96 
Sprint, 44 

Statistical Abstract, U.S., 31 

Sterling, Bruce, in 

stock, stock markets, 53, 157-59 

subcultures, 126-27, 132 

submarine steering simulation, 17-18 


basic rules of, 90 

questioning of, 93 

self-limiting, 25 
success, self-reinforcing (increasing 
returns), 23-38, 161 

biological model of, 31-35 

exponential growth and, 23-25 

law of increasing returns and, 25-30, 

strategies for, 36-38 

threshold of significance and, 34-35, 34 

tipping point and, 34-35, 34 
Sun, 57, 58 

supply curves, 55-56, 55 
swarm technology, 13-18, 21-22, 161 
aim of, 16 

bottom-up vs. top-down control in, 

Tamagotchis, 32 
taste space, 125-26, 126 
Taylor, Frederick, 148 
TCP/IP, 24, 41, 71 
technical standards, 70-73 
technological revolution, technology, 1, 
8, 31-35 

Index / 179 

biological growth in, 31, 32-33 
as culture, 33-35 
demise of, 84-85 
early vs. quality, 29 
"enabling," 5 

equity culture and, 156-59 
invisible, 19-20 

opportunities and, 45, 145, 152-54 
protocommercial stage of, 60-62 
relationships and, 118-19, 122-30, 

132-33, 135-39 
size of companies and, 101-2, 101 
Supply/Demand Flip and, 55-56, 55 
swarm, see swarm technology 
values and meaning and, 159-60 
worth of, 137 
telecommunications, 3, 44, 52, 119, 132 
telephones, 27, 34, 43, 54-55, 153 
cellular, 44, 58 
data vs. voice traffic on, 13 
networks of, 24, 26 
prestandard phase of, 68 
television, 32, 106, 137, 153 
cable, 37 
direct-, 58 
future of, 92 

home-shopping networks on, 34-35 
Web, 35, 49 
Texas, business life span in, 109 
Texas Instruments, 149 
Thomson, 57 
Thurow, Lester, 72 
tipping point, 34-35, 34 
Toffler, Alvin, 103, 108, 121, 132 
Torvalds, Linus, 61 
tragedy of the commons, 60-61 
Transparent Society, The (Brin), 

transportation, 33, 50, 69 

see also airplanes, airline industry; 

automobiles; automobile industry; 

Tree of Life, 14 
trucking, 6, 7 
trust, 119, 123, 132-38 
Truste, 135-36 
TV Guide, 59-60 
1211 transistor, 53 

Ultima Online, 121-22 
Unix, 24, 61, 64, 71 

Useem, Jerry, 109 

user groups, 130-31 

Utterback, James, 85 

vacuum tube technology, 84-85 


in economies of scale, 26 

generosity and, 57-59 

increasing returns and, 26-28 

maximizing of, 67-69, 79-80 

n2, 24, 27, 36 

plentitude and, 39-42, 40 

of relationships, 124-25 

scarcity and, 40 

in webs, 97-100 
values and meaning, lack of, 159-60 
Van Gogh, Vincent, 145 
VHS, 29 

video, 67, 68, 8i, 99 
video games, 45 
virtual corporations, 139 
virtual reality (VR), 152 
voice mail, 119 

Walls, David, 38 
Wal-Mart, 85 
wants vs. needs, 152-53 
wealth, 52, 59, 156-60 

origin of, 141-44, 142 
Weber, Alan, 132, 133 
Webonomics (Schwartz), 127 
web sites, 93, 132, 144 

badges on, 135-36 
WebTV, 35, 49 
Weiser, Marc, 19 
Well, 42, 70-71 

"Why Every Business Will Be Like Show 

Business" (Kotkin), 111 
Windows, 29, 30 
Windows NT, 41, 81 
Wired, 4, 6, 99 
Wired Digital, 99 

World Wide Web, 7, 13, 46, 90, 104, 

browsers for, 57, 58 

generosity and, 60, 61-62 

indexes to, 59 
Wright, T. P., 149 
Wriston, Walter, 3 

X-Windows, 61 

youth cultures, 32 
zillionics, 46